The government has set out plans to impose a digital services tax on the UK revenues of online companies including Google and Facebook, in a move that could sour trade talks with the US.
The 2% levy on the British revenues of search engines, social media services and online marketplaces, first announced in the 2018 budget, is an attempt to keep some of the economic value created by technology companies in the country, ahead of planned international action by the Organisation for Economic Co-operation and Development (OECD).
Some of the world’s biggest companies pay relatively little UK tax, because the digital services they offer, such as advertising and fees for connecting buyers to sellers, technically take place offshore. That allows them to keep their tax burden low in major economies, and book the majority of their revenues in low-tax environments such as Ireland and Luxembourg.
The digital services tax will instead be charged on revenue raised from UK sales, regardless of where the company is based. Estimates suggest it will eventually raise more than £500m a year, but it was not part of Wednesday’s budget announcement. The confirmation was buried instead in a tranche of documents release by the Treasury.
The quiet launch will be seen as an attempt to downplay the news at a time when the UK is preparing to try to negotiate a post-Brexit trade deal with the US. The limitations put in place by the Treasury ensure that almost all of the revenues will come from US tech companies. Only companies with £25m of revenues are covered by the tax, and the list of affected businesses includes Google, Facebook and Amazon. European digital successes such as Spotify and Monzo are excluded because they do not operate “search engines, social media services and online marketplaces”.
Washington views any digital taxes as a direct attack on US interests, and said as much to France when it proposed its own version. It also threatened to retaliate with tariffs on wine, cheese, handbags and cookware.
There are many details yet to be decided. Zubin Patel, and international tax partner at Deloitte, said: “The government has announced that it will continue to consult on whether the regime should also apply to marketplace delivery fees.”
All the carve-outs limit revenue-raising possibilities. The Office for Budget Responsibility expects the tax to raise £280m in its first year in effect, rising to a little over £500m by the end of 2025.
The digital sales tax is one of a number of tech-focused measures in the budget. The chancellor, Rishi Sunak, also announced billions of pounds in R&D investment, billions more for high-speed broadband and a tax cut for digital media, allowing digital books, newspapers, magazines and academic journals to be sold free of VAT like their print counterparts.
Patel believes the tax is likely to be short-lived. “The taxation of the digital economy continues to be a global challenge and the government has again made it clear that it is committed to an OECD-led consensus solution to the problem, at which point the digital services tax will be repealed,” he said.
