Budget 2018: digital services tax on large platform companies announced

A tax on large digital companies that operate within the UK or provide services to customers, including social media and online marketplaces, has been announced by the Chancellor, who denied that it would be a ‘digital sales tax’

‘The rules have simply not kept pace with changing business models,’ said the Chancellor, noting that ‘a new global agreement is the best long-term solution’ but such a solution had yet to be reached.

The Chancellor denied that this would be ‘UK digital sales tax’, noting that it would not be paid by internet customers. ‘This is not an online sales tax on sales on the internet. The digital services tax will only be paid by businesses that are profitable and generate more than £500m in global revenue.’

The tax is designed to ensure that ‘large, established, digital services companies pay their fair share' by contributing a percentage of the revenue from 'search engines, social media platforms and online marketplaces, reflecting the value they derive from UK users’.

Under the plan, large digital platforms would be taxed 2% on the money they make from UK customers. The tax will come into effect in April 2020 and is intended, according to the Budget Red Book, to produce £275m in revenue by 2020-21.

Stella Amiss, head of tax policy at PwC, noted that the Chancellor had already mentioned such a tax earlier in October when he criticised the US government for stymying international discussion of a digital services tax.

'The Chancellor’s strong words of recent months were no bluff. At home, the confirmation of a new digital services tax was trailed as a step towards levelling the playing field between online retailers and the high street. But it is much more than that. Working out who is taxed and who is not in the digital economy is no mean feat when all businesses operate in an increasing technological world.

'It is no surprise then that the Chancellor has approached this with caution - a narrowly targeted regime, a 2% rate, and an effective implementation date pushed back to 2020. This new tax is well and truly aimed at the tech giants and not the online retailers so will do little to address the woes of bricks and mortar retailers and could well be perceived across the pond as an anti-American measure that could come back to bite us as the UK looks to move to trade talks after the Brexit deadline.'

According to Ben Jones, corporate tax partner at Eversheds Sutherland, the Chancellor should be careful about the impact of the tax: 'Although the political pressure to push forward unilaterally with a digital services tax must be great, the Chancellor should exercise caution.

'There remains a case to be made regarding whether a digital services tax is a fair, reasonable or appropriate tax measure, and in any event moving ahead now with such a tax without broad multi-jurisdictional support could create trouble for the U.K. that outweighs any tax or political benefits that could be gained.'

Miles Dean, managing partner of Milestone International Tax, said:

'At a time when the UK must pull out all the stops to attract inward investment with Brexit looming on the horizon, it beggars belief that a Conservative Chancellor should contemplate levying a brand new tax on companies that have already invested heavily in the UK, employ thousands of people and who total tax contribution is very often overlooked.

'The reality is that Philip Hammond needs to raise revenue somewhere but inventing a digital services tax is not the answer.

'The idea that the UK is prepared to go it alone without any international consensus is ridiculous and will undoubtedly lead to a retaliatory response from trading partners, most likely the US.'

Report by James Bunney

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