The UK government announced in November 2018 that a digital services tax will be introduced in the year 2020. A consultation process is currently underway to identify stakeholder concerns and issues relating to the new tax and formulate a plan for future implementation.
What Is The Digital Services Tax?
The digital services tax is an entirely new tax proposal and one key reason for the initiative is to levy and collect taxes on UK-related profits of some of the major, global high-tech providers operating across international borders. Major companies impacted by these changes will include Facebook, Google and Amazon.
The government argued that existing tax laws are inappropriate for the digital era we now face. It's common for the major players in the internet arena to operate across borders, yet no international tax agreements are in place to retrieve some of the profits that businesses gain from country-specific trading.
The UK Chancellor and government officials argue that the internet giants rely on user activity in specific countries to enable the creation of a market and/or advertising sales. The new digital services tax will be returned via the existing corporation tax returns system and will be levied at a rate of 2% on applicable revenues generated by UK customers via all qualifying digital service providers
What Is A Qualifying Digital Service?
The government is making no bones about the fact that this new tax is aimed at the tech giants. Digital services taxes will only be applied to providers with global sales in excess of £500m. Therefore, the tax won't apply to tech startups or smaller e-commerce sites in the UK or globally. The government's consultation document sets out the digital businesses considered to fall within the scope of this new tax and the ways in which UK revenues will be identified or apportioned (insert link https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/754975/Digital_Services_Tax_-_Consultation_Document_FINAL_PDF.pdf). In addition, the tax will not be applied to the first £25m of UK sales. The tax will be applied on business revenues for accounts periods that end on or after 1 April 2020.
Very many of the digital service providers impacted by the new digital services tax are currently based in America or China. What this will mean, however, is that these companies will effectively be taxed twice on a proportion of their annual trading profits.
You can read the entire government consultation document online (insert link https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/754975/Digital_Services_Tax_-_Consultation_Document_FINAL_PDF.pdf) or get in touch with one of the experts at David Howard for more information.