An overview of the new Digital services tax (DST)
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A new digital services tax (DST) will be introduced from April 2020. This follows a consultation which commenced in November 2018 where the government response confirmed that it still supports an international solution that the OECD is working towards but noted that this global process will take time. The DST is therefore seen as an interim measure and will be disapplied when an appropriate international solution is in place.
The DST is a 2% tax on UK digital services revenues. Digital services revenues for a group are the total amount of revenues arising to members of the group which are in connection with any digital services activities, as defined below, and UK digital services revenues are those digital services revenues that are attributable to UK users.
DST will only apply if a group exceeds the annual thresholds which are:
So effectively there will be an annual allowance on the first £25m of UK digital services revenues. As the DST is a revenue based tax it may be disproportionately high on businesses with low profit margins or losses so there will be an alternative charge provision or ‘safe harbour’ election which allows a calculation of DST based on operating margins and therefore provides relief for businesses with low profit margins or losses.
Digital service activities means providing:
Property and includes any associated online advertising business. An associated online advertising business is a business operated on an online platform that facilitates the placing of online advertising, and derives significant benefit from its connection with the social media platform, search engine or online marketplace.
Activities are not defined in the draft legislation but the draft guidance issued at the same time gives HMRC’s view that an activity will meet two conditions. Firstly it would be something done for commercial purposes i.e. services or functions provided for or on behalf of third parties. Secondly the activity would be a substantive business service and not simply incidental or ancillary to a broader function.
There is a specific exemption for online financial marketplaces if the qualifying conditions are met.
UK users means any person who it is reasonable to assume is normally in the UK, if they are an individual, or are established in the UK, if they are a business. There is no further detail in the legislation on how to establish whether a user is a UK user but the draft guidance states that businesses should use all the information available to them so that if the user has a UK address or UK payment details they are likely to be a UK user.
Revenues will be attributable to UK users in respect of online advertising where the advertising is intended to be viewed by UK users. For all other types of digital service activities revenues are attributable to UK users if they arise in connection with UK users which is a broad rule and would include subscription fees, payments to access content or a premium service.
In addition, all of the revenues that arise in connection with a transaction on an online marketplace are attributable to UK users if one of the parties to the transaction is a UK user, this could be either the consumer or the provider of the goods or services in question. If the online marketplace transaction involves UK land, the revenues that arise in connection with the transaction will be attributable to a UK user even if the owner of the land is not a UK user. This includes revenues in connection with the sale or rental of land and the provision of accommodation. Because of these provisions, double taxation may arise on revenues where another user is based in a country which has a similar tax to the DST so there is relief for certain cross-border transactions which reduces the UK digital services revenues by 50% when a claim for the relief is made.
The total DST liability will be calculated at the group level but the tax will be charged on the individual entities in the group that realise the revenues that contribute to this total. The group consists of all entities which are included in the group consolidated accounts, provided these are prepared under an acceptable accounting standard. Revenues will consequently be counted towards the thresholds even if they are recognised in entities which do not have a UK taxable presence for corporation tax purposes.
A DST return must be delivered to HMRC for each accounting period before the end of one year from the end of the accounting period. A group can use a nominated company to file a return. DST will be payable for an accounting period on the day following the end of nine months from the end of the accounting period, this differs from the proposals under the consultation which were for payments to be made quarterly. For these purposes a group’s first accounting period begins on 1 April 2020 and ends with the first accounting reference date to occur after that date or, if earlier, with 31 March 2021. Subsequent accounting periods, for the purposes of DST, end with the first accounting reference date to occur after the end of the last period or one year, if that is earlier. The accounting reference date means the date to which the group’s accounts are made up.
There are no specific provisions concerning the deductibility of DST for corporation tax purposes and therefore the general rules on wholly and exclusively will apply.
The draft legislation includes provisions about DST returns, enquiries, assessments and appeals in Schedule 1. There are penalties for failing to file a return by the filing date.
There are anti-avoidance provisions for relevant avoidance arrangements.
Further analysis of the announcements made on Legislation Day is available in TolleyLibrary.
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