What's the issue?

The operation of current corporate tax rules to businesses operating in the digital economy has been a considerable issue as it has led to what the UK government describes as a misalignment between the place where profits are taxed and the place where value is created. While an international solution has long been sought and is still under discussion, some countries, including the UK, have decided to set up their own measures pending international agreement. 

What's the development

The UK's Digital Services Tax (DST) applies from 1 April 2020.  It is a 2% tax on businesses with global annual turnover of over £500m where more than £25m of annual revenue is generated from providing social media services, internet search engines or online marketplaces to UK users.  The first £25m of revenue from UK users will be exempt.

The tax is on revenue not profit and it applies to global group revenue so the thresholds should be calculated at group level but liability is at entity level and groups have to nominate a company to fulfil reporting obligations. 

The details of the tax are set out in a manual.

HMRC has also now issued further guidance on:

• Check if you need to register for DST
• Register for DST and change your details
• Pay your DST
• Submit a DST return
  
  

What does this mean for you?

If you are caught by the DST, you will need to register. HMRC reminds businesses with an accounting period which ends soon after 1 April 2020, that they should register to avoid a potential penalty.  Payment of the tax is due within nine months and one day from the end of the relevant accounting period.

Read more

By way of reminder the tax applies to:

• Social media platforms which both:
  • promote interaction between users
  • have user content as a significant feature of the service
• Examples of social media platforms include:
  • social or professional networks
  • blogging or discussion platforms
  • video or image sharing platforms
  • dating platforms
  • review platforms

• Search engines - This does not include internal website search engines
• Online marketplaces which facilitates the sale of goods and services offered by third party users. This does not include online marketplaces that sell financial services.

A UK user is either:

• an individual that is normally located in the UK
• a business established in the UK.

This may be different to where the user is located at the time of the transaction.  Evidence must be used to determine a user's location.  Sources of evidence can include:

• delivery address
• payment details
• IP address
• intended destination of advertising based on contractual evidence
• the location of property or goods rented out.

If there is conflicting evidence about the user’s location, the most appropriate should be used to determine where the user is normally located.

Read more about the DST here.