UK government drafts Digital Services Tax legislation

The UK government has published a draft version of its upcoming Finance Bill, which includes a requirement that 'large digital businesses pay a new Digital Services Tax that reflects the value derived from their UK users.'

Global governments have been proposing tax reforms for businesses providing cross-border digital services for years, with EU finance ministers proposing a dedicated tax back in September 2017. In October 2018 the UK government's 2018 Budget included a proposed 'Digital Services Tax' which would be 'a narrowly-targeted tax on the UK-generated revenues of specific digital platform business models' - primarily as a means of closing a loophole which has seen companies like Google dodge billions in tax.

Now, that draft legislation is up for discussion. Described by the government as 'a targeted, proportionate, and temporary tax,' the Digital Services Tax will only apply to companies above a certain size and who make a recognised profit from UK customers; those running small businesses or who operate at a loss will not be asked to pay, something the government claims will help to protect start-up companies. These limits have been set to apply to companies with worldwide revenue in excess of £500 million of which in excess of £25 million is derived from UK customers.

'The UK has always sought to lead in finding an international solution to taxing the digital economy,' claims Financial Secretary to the Treasury and Paymaster General Jesse Norman. 'This targeted and proportionate Digital Services Tax is designed to keep our tax system in this area both fair and competitive, pending a longer term international settlement.'

The tax places a two percent levy on UK-derived revenue for companies affected, on top of existing taxes including VAT and corporation tax. The first £25 million in revenue, however, is tax-exempt. The government projects that the tax will add £275 million to the public coffers in the coming financial year, providing it is enacted as planned in the 2020 Budget, rising to £440 million by 2023. It will cost, meanwhile, an estimated £8 million for additional staff, IT facilities, and administrative overheads.

The announcement comes as France has brought its own digital services tax into effect, set at a higher level of three percent but applying only to companies with more than €750 million (around £670 million) in global revenue.