As we wait for the OECD to establish a universal tax regime, the UK has brought in rules affecting not just global names but many of those whose businesses are linked to digital services groups.
It’s a subject widely reported in the press, mainly because it involves a deep sense of injustice. Well-known technology brands are accused of not paying their fair share of tax. It’s clear the existing international tax reporting regime is unable to deal adequately with the digital economy.
A move to a system of taxation based on customer location has been on the agenda of the Organisation for Economic Co-operation and Development (OECD) for some time, in discussion with over 100 countries. Meanwhile many European countries are implementing their own digital services tax (DST). In the UK the DST was part of the Finance Bill 2020 and applies retrospectively from 1 April 2020.
Who will be affected?
DST affects businesses that provide a social media service, internet search engine or online marketplace to UK users. It extends to companies or groups with an online service that facilitates any associated online advertising and derives significant benefit from it.
Where an activity is ancillary or incidental to a digital services activity, its revenues may also be subject to DST.
DST will normally be at a rate of 2% charged on UK digital services revenues. Entities can also calculate the liability using an alternative basis. This will benefit those making a loss or operating at a low margin on their UK digital services activity.
The new tax will apply to a group with:
annual worldwide revenues over £500 million that arise from relevant digital services and
over £25 million of these revenues being attributable to UK users.
But it’s worth noting an exemption for financial services providers, where the first £25 million derived from UK users will not be subject to DST.
DST is payable annually, nine months and one day after the accounting period, by a nominated group company.
Many businesses will carry out numerous activities or services, some constituting the core of the business and others support activities. Some services may be so closely integrated that they are offered to the customer as one package. HMRC says a support activity is only considered an online service if it can operate as a commercially viable service in its own right.
To be liable for DST, an activity must be provided to, or on behalf of, third party users and must generate third party revenues. Services only provided to members of the same group do not apply.
Services that are substantially provided offline will not normally incur DST, unless their online element is significant enough to qualify as an individual service in its own right.
Where services are ancillary or supportive to other services provided by the group, it will depend on whether they are simply a part of a broader service or are distinct from it.
The categories in detail
1. Social media will typically cover:
Social networking sites
Professional networking sites
Video or image sharing platforms
Online dating websites
Platforms that primarily exist to share user reviews
Services like online forums or some online games may also be liable. But it will depend on how extensive and important the interaction between users and user generated content is to the service.
Telecommunications networks or private communications platforms like email services are not covered.
2. Internet search engine: an online service whose core purpose is to allow users to search for webpages or information across the internet. But a facility on a website to search the material just on that website will not be affected to DST.
3. Online marketplace: an online service which provides an online market for goods, services and other property by connecting users seeking something with other users who are willing to provide it. The exchange of goods and services between third party users and the facilitation of the sale are central purposes of the online service.
What does ‘UK user’ really mean?
A UK user is someone normally located in the UK. By ‘UK user’ the rules usually refer to revenue arising when a UK user has engaged with the service. But there are some exceptions.
Where just one of the parties to a transaction on an online marketplace is a UK user, all the revenues from that transaction are treated as derived from UK users.
When the transaction involves accommodation, land or buildings in the UK, revenue from that transaction is treated as derived from UK users. When the transaction involves accommodation, land or buildings not in the UK, revenue is only liable if the consumer of the service is a UK user.
Advertising revenues count when the advertisement is viewed or otherwise consumed by a UK user.
How is DST calculated?
The total DST liability is calculated at group level, but the tax is charged on the individual entities in the group whose revenues contribute to the total. The group consists of all entities included in the consolidated accounts, provided these are prepared to an acceptable accounting standard.
So revenues are counted towards the DST thresholds even if they are from entities without a UK taxable presence for corporation tax.
What about the big tech giants (like Facebook, e-Bay and Google) which DST aims to target? Recent reports claim that Amazon, one of the most well-known online retailers, will not have to pay DST. But, instead, small traders who sell products on its site will face increased charges.
As the charge is not levied on sales, but rather on service fees charged to third parties, the tech giants will doubtless pass the charge on to those third parties.
So it’s not always the biggest fish who are affected. If you aren’t sure whether the DST will apply to you, our experts can help you.