Digital Service Tax
For some years now, the OECD have been working towards an international approach to the taxation of digital businesses. Most recently, it announced that it is aiming towards a consensus-based long-term solution by the end of this year. Be that as it may, with a number of diverging opinions on how this aim may best be achieved, delay in the international implementation of this tax has resulted in many countries now enacting their own tax laws on digital services. The United Kingdom is one such country. Accordingly, the Finance Bill 2020 introduces a Digital Services Tax (“DST”) of 2% on “UK digital services revenues arising to a person in an accounting period.”
Digital Services Revenues
All of the following will normally be classed as digital services revenues:
- A social media platform which promotes interactions between users and allows content to be shared, for example social network sites, online dating websites and user review websites; or
- An internet search engine; or
- An online marketplace which facilitates the sale by users of services, goods or other property; or
- A business which operates on an online platform, facilitates the placing of online advertising, and derives a significant benefit from its connection with the social media platform, search engine or online marketplace.
This broad definition seems to encapsulate a wide range of businesses. The draft legislation does not elaborate further, but the draft guidance issued with the Bill does confirm that HMRC will only impose this tax on businesses whose activities listed above form a independent purpose of their service. HMRC have confirmed that they will not consider those digital services which are simply incidental or ancillary to a broader function or service. The extent to which a service can be deemed ancillary remains to be seen.
UK Digital Services Revenues
Another requirement which must be met before the DST will be imposed, is that the digital services revenues must be arise in connection with “UK users”. Therefore, the revenues acquired will only qualify if:
- In the case of an individual using the digital service, it is reasonable to assume that they are normally in the United Kingdom (“UK Individual”); or
- In the case of a business using the digital service, it is reasonable to assume that they are established in the United Kingdom (“UK Business”); or
- In the case of online advertising, it is intended to be viewed by either of the above; or
- In the case of a transaction on an online marketplace, either the consumer or provider is a UK Individual or UK Business.
DST Threshold
The DST will only be imposed if the total annual revenues for the group as a whole exceed:
- £500m in digital services revenues; and
- £25m specifically in UK digital services revenues.
Other Points to Note
- For those upon whom DST will be charged, a return must be filed and DST will become payable on the day following the end of nine months from the end of the accounting period. As with other obligations to file tax returns, penalties will be levied for failing to file the return by the filing date.
- To prevent a disproportionately high tax on businesses with low profit margins or losses, the Bill includes an alternative charge provision which allows a calculation of DST based on operating margins.
- In an attempt to prevent double-taxation, there is provision for relief to be claimed for certain cross-border transactions which, if claimed, would deem the UK digital services revenues reduced by 50%.
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Our Insights
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners [2022] UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners [2022] UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (imw@jha.com).
