The digital services tax applies to revenue earned from specified digital services from 1 April 2020.
It is a temporary tax in the context that:
- The Government has pledged to review it before 31 December 2025, and
- It is likely to be repealed once the proposed OECD Pillar 1 rules are agreed and put into effect
The tax is based on the UK digital services revenue (see below) of a worldwide group of companies. It is 2% of such revenue for the group’s accounting year in excess of a group annual allowance of £25 million. The group can elect to instead pay tax of 8% of the UK operating profit realized by the group from the relevant activity if that will produce a lower charge. The tax is payable 9 months after the end of the accounting year.
However the tax is payable only if the worldwide revenues from the digital services activities (see below) of a group exceed £500 million for the accounting year.
The person responsible for making tax returns and paying the tax is the parent company of the group. However the group can appoint a different group company – such as a UK resident one – to take on those responsibilities (but subject to HMRC being able to void the appointment if that company neglects those responsibilities).
UK Digital services revenues are:
- Online marketplace revenues where they arise in connection with a marketplace transaction (ie one between users in the marketplace) and one of the parties is a UK user
- Online marketplace revenues that arise in connection with particular accommodation or land in the UK (including the provision of services, goods or other property in relation to such accommodation)
- Online Marketplace revenues that arise in connection with online advertising for particular services, goods or other property where the advertising is paid for by a UK user
- A just and reasonable allocation of other online advertising where the advertising is viewed or otherwise consumed by UK users (and of other revenues that arise in connection with UK users)
For this purpose a UK user is an individual who it is reasonable to assume is normally in the UK and a non-natural person that is established in the UK. A user is not defined but excludes a member of the same group as the provider and an employee of the provider or another group company. Normally in the UK is not defined; it is clearly different to being tax resident in the UK.
Digital services activities are online services that relate to:
- Social media services
- An internet search engine, and
- An online marketplace
If a group carries on more than one of these digital service activities the revenue from each is ascertained separately and then aggregated.
For this purpose a social media service is an online service one of the main purposes of which is to promote interaction between users (including between users and user-generated content) and for which making content generated by users available to other users is a significant feature of the service. An internet search engine does not include a facility on a website that merely enables a person to search the material on that website (or on that and closely-related websites). There is an exemption for online financial marketplaces, ie one where over 50% of the revenue arising to the provider arose in connection with the provider’s facilitation of the trading of financial instruments, commodities or foreign exchange.
Where another country also imposes a digital services tax on a relevant transaction, only 50% of the relevant digital services revenue needs to be recognized in the UK.
HMRC say that an activity can be a DST service only if it is provided to (or on behalf of) third parties and generates third party revenues which are recognized in the group’s consolidated financial statements. They also say that services which are provided to members of the same group, such as a social network that is used only in a single organization to enable its employees to share information and is not sold to third parties, would not be a DST service. They also say that a service that is substantially provided offline is unlikely to be within DST merely because there are online supportive functions.
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