The Digital Services Tax: What is it and who is affected?

In April 2020, the government will introduce a new 2% tax on the revenues of online marketplaces, search engines and social media platforms which derive value from UK users.

Why has the government passed the new legislation?

The digital economy has developed significantly over the past couple of years and has brought a host of new benefits along with it. The government has passed the new tax legislation as it believes that there is a misalignment between the country where the profits are taxed and the country where the value is created. The digital services tax will ensure digital businesses who have operations in the UK and profit from UK users will contribute to supporting the UK’s public services.

The government has introduced the legislation as an interim action as it believes that the most sustainable long-term solution is to reform international corporate tax laws. The government has proposed to revoke the digital service tax when an appropriate global solution is in place.

How will the tax work?

If a company’s revenue exceeds more than £500 million in global revenues – more than £25 million of which are obtained from UK users – the company will be taxed at a rate of 2% on the revenues derived from UK users. The tax applies to social media platforms, search engines and online marketplaces. It will only be applied to revenues that are attributable to in-scope business models whenever the revenues are derived from UK users.

The legislation includes a safe harbour clause within its design. This allows businesses which are either making a loss or have very low-profit margins to elect to use an alternative calculation to determine their tax liability. The safe harbour ensures that the tax will not have a disproportionate impact on businesses sustainability and will only be used as a limited feature to ensure the legislation is proportionate.

The tax will be reported and paid on an annual basis – for more information visit the government’s website.

What is included in the scope of the legislation?

The legislation states that big-earning companies may be liable to pay the tax if they generate revenues that are attributable to UK users. A UK user is someone who is living in the UK or are normally in the UK. Businesses with activities inside and outside of the UK will need to separate their revenue reporting between in-scope and out-of-scope business lines.

Revenues can be linked to a UK user if any of the following apply:

• If payment is made by a UK user
• If the advert is targeted at a UK user
• If a UK user is involved in a cross-border transaction

The three business categories which the legislation focuses on are:

• Social media platforms – revenue is generated by monetising user engagement with the platform via user-generated content or interaction.
• Online marketplaces – revenue is generated through the sale of goods or services, users listing advertisements or revenue earned from user engagement with a website.
• Search engines – revenue is generated through advertising against search results, websites accessed via a search engine or where monitoring user data facilitates an increase in revenue.

Please note – there is an exemption for financial and payment services providers from the online marketplace definition.

Who is affected by the tax?

The thresholds mean that small businesses and start-ups should not be negatively impacted by the new legislation; the tax is aimed more towards global multinational giants. Whilst a 2% tax will not massively impact companies whose profits are high, low-margin businesses may not welcome the additional cost.

Churchill Knight stays up to date on the latest industry legislation

Churchill Knight & Associates Ltd has been supporting contractors and freelancers since 1998. Our expert accountants stay up to date on the ever-changing legislation and tax laws that both affect and interest contractors. We can also advise you on the best payment structure to follow for your business – use our take home pay calculator to get started.

Find out more about our limited company accountancy packages or call us on 01707 871622 to speak to an expert.

* Calculator for illustration purposes only and uses assumptions. Limited figures based on 52 weeks, expenses £50 per week, £9,100 salary and accountancy fees included. As of 1st April 2023, there is no longer a single rate of Corporation Tax. The calculator uses assumptions and estimates and is designed to be accurate by individual circumstances will vary. Umbrella figures based on 52 weeks, £15 per week margin and holiday pay paid out. For a more accurate calculation tailored to your requirements, please contact Churchill Knight today by calling 01707 871 622 or contact us here.