Government to introduce 2% digital services tax

The UK Government has confirmed plans to introduce a new 2% tax on the revenues of online marketplaces which “derive value from UK users”, starting 1 April 2020.

The new tax also applies to search engines and social media services, and these businesses will be liable to the tax when its worldwide revenues from digital activities is more than £500m and more than £25m if revenues are derived from UK users.

HMRC said the application of the current corporate tax rules to businesses operating in the digital economy has led to a “misalignment” between the place where profits are taxed and the place where value is created.

It added that many of these digital businesses derive value from their interaction and engagement with a user base.

Under the current international tax framework, the value businesses derive from user participation is not taken into account when allocating the profits of business between different countries.

HMRC said this new measure will “ensure” the large multinational businesses in-scope make a “fair contribution to supporting vital public services”, and believes it will add as much £515m in additional annual income by the end 2025.

HMRC said: “The government still believes the most sustainable long-term solution to the tax challenges arising from digitalisation is reform of the international corporate tax rules and strongly supports G7, G20 and OECD discussions on long-term reform.

“The government is committed to dis-applying the Digital Services Tax once an appropriate international solution is in place.”