How to design a digital services tax


In the Budget, The Chancellor announced the introduction of a “narrowly targeted” Digital Services Tax. It is indeed narrowly targeted, focused only on businesses that provide social media platforms, search engines or online market places and generate annually more than £500m of global annual revenues and £25m of UK revenues from these activities. It is a bit like a tax on all people named John Smith who live in Acacia Grove and have three children, a dog and a goldfish!

DST will be 2% of UK revenues (not profit) from in-scope activities and is expected to raise £400m a year. So the businesses in this exclusive club are each expected to incur quite significant tax bills. It is therefore going to be important to ensure that the rules of this new tax are clearly defined. Therein lies the challenge.

The consultation document issued by HM Treasury asked many of the questions that we were asking when the DST was announced. How should the in-scope business activities be defined? What if a group also carries on out-of-scope activities? TV and music subscription services are out-of-scope, but what about games? If selling your own goods is out-of-scope, but providing a market place for third party goods is in-scope, how does a mixed business allocate revenues between the two activities?

The cliff-edge nature of the tax means that calculating revenues is essential. How does one calculate UK-generated revenues in relation to business models that rely on user participation or content, and derive most of their revenue from focused advertising and data collection, rather than fees payable by users? Is a UK user someone resident in the UK, someone accessing content from the UK, or someone using a UK IP address? What about advertising that is focused on attributes other than the location of the user?

The tax will come into effect in April 2020, unless an alternative globally agreed solution emerges before then. The John Smiths therefore need to decide whether to help HMRC work up a DST regime that they can operate or to lobby urgently for an alternative global profit allocation model.

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