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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

It was back in Autumn Budget 2018 that ex-chancellor Phillip Hammond announced that the UK would take unilateral action to introduce a Digital Services Tax.

With a new Chancellor, and a new Prime Minister with a rather close relationship with Mr Trump, it is interesting to see whether this brand new tax will see the light of day. Particularly if Boris Johnson wants to avoid the same awkward phone call Mr Macron received from Donald Trump!

Anyway, following the publication of Finance Bill 2019/20 on 11 July 2019, the Digital Services Tax is still destined to take effect from April 2020,

The Digital Services Tax is a levy that will apply to revenuesderived from social media platforms, search engines and other online marketplaces.

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

Types of business affected

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

  1. Social media platforms:For this type of business, the tax would attach to revenues generated by advertising targeted at UK users. For example, where a UK user clicks on advertisement. In addition, it will also seek to tax other forms of sales revenues such a subscription fees paid by UK users;

  2. Search engines. For this type of business, the digital services tax would target revenues generated by UK participators. It will primarily seek to capture a shares of advertising revenues where the advertising is targeted at the businesses UK users;

  3. Online marketplaces: For this type of business, the tax looks to grab a share of revenues resulting from both transactions involving a UK user (eg sales commissions) and revenues from advertising targeted at UK users.

In terms of deciding who is a UK user then this will be determined by the concepts of ‘normal residence’ and of  ‘primary location’.

Exclusions

Make no mistake, this tax is aimed fairly and squarely at the big boys and girls of the digital services market place.

This is borne out by the fact that a business will only be taxable where it generates:

  • In excess of £500m of worldwide turnover from relevant activities; and
  • In excess of £25m of worldwide turnover from relevant activities linked to UK users.

The new tax is only payable on revenues exceeding the £25m threshold.

There is also what is referred to as a “safe harbour”. This is a provision that will allows for businesses with very low profit margins (or loss-making businesses) to elect an alternative form of calculation and a lower rate of digital services tax.

Double taxation?

Of course, if a tax is paid on revenues and the business also suffers UK corporation tax then there will be double taxation of the same profits.

Accordingly, amounts paid under this new tax are deductible against UK corporation tax under the normal rules.

However, it will not give rise to a tax credit either under the UK domestic regime, or pursuant to any double tax treaties.

 

If you have any queries about the new digital services tax on revenues then please do not hesitate to get in touch

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