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Budget 2020: Digital Services Tax

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Digital Services Tax

Introduction

The Government set out that it will legislate in Finance Bill 2020 for the introduction of the Digital Services Tax.

The Digital Services Tax is a newly created tax that applies to the revenues of specific digital businesses.

Only revenue linked to the participation of UK users will be brought within the charge.

Background

Phillip Hammond (remember him?) introduced the tax in Autumn Budget 2018. It signalled the UK’s intention to take unilateral action to introduce a Digital Services Tax.

We’re on to our second new Chancellor since then and now have a new Prime Minister with a rather close relationship with Mr Trump.

However, undeterred, it seems that Boris Johnson is happy to have the same awkward phone call encounted by President Macron!

Types of business affected

The new legislation identified three categories of business that are potentially within the scope of the new tax:

 

Type of businessHow the tax will apply
Social media platformsThe tax would be applied to revenues generated by advertising targeted at UK users.

For example, where a UK user clicks on advertisements.

In addition, it will also seek to tax other forms of sales revenues such a subscription fees paid by UK users

Search enginesHere, the tax would target revenues generated by UK participators.

It will primarily seek to capture a shares of advertising income where the advertising is targeted at the businesses UK users

Online marketplacesThe tax will grab a share of revenues that results from both transactions involving a UK user (such as a sales commissions) and revenues from advertising targeted at UK users.

 

The concepts of ‘normal residence’ and ‘primary location’ will be used to determine who is a UK user.

A tax for the big boys and girls?

Absolutely.

 

This is demonstrated by the fact that a business will only be in the scope of digital services tax where it generates:

 

  • More than £500m of international turnover from relevant activities; and
  • More than £25m of international turnover from relevant activities linked to UK users.

The new tax is only payable on the excess of revenues over that £25m line in the sand.

 

Safe harbour

 

This is designed to allow provision businesses with very low profit margins  – or businesses that are making a loss – to elect an alternative form of calculating the tax and a reduced rate of digital services tax.

 

Double taxation?

 

If a tax is paid on revenues and the business also suffers UK corporation tax on its profits then there clearly will be double taxation.

As such, any amounts paid under the digital services tax are deductible against UK corporation tax.

 

“They’re starting to tax other people’s products… so, therefore, we go and tax them.”

 

Trump had a bit of tantrum when the French outlined similar measures. Will he take an equivalent to the anti-fromage stance he took with the French?

 

For further details see our full article on this.

 

 

If you have any queries about the new digital services tax, or any other tax matters,then please do not hesitate to get in touch

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