Share with your friends

Draft Finance Bill: UK Digital Services Tax

Draft Finance Bill: UK Digital Services Tax

Government publishes Digital Services Tax draft legislation.


Also on

On 11 July 2019 the UK Government published the draft legislation on the Digital Services Tax (DST) as part of the draft clauses for Finance Bill 2019-20. This follows the announcement made in Budget 2018 that the UK would introduce a tax designed to address the misalignment between where profits are taxed and where the value is created by UK user participation in the digital businesses context. A consultation on the matter closed in February this year.

Overview of DST

Types of digital services activity

The UK Government confirmed it will introduce a DST of 2 percent from April 2020 on the following three types of digital services activity (previously known as ‘in-scope business activates’ in the consultation document):

  1. a social media platform, 
  2. an internet search engine, or 
  3. an online market place (with an exemption for financial and payment services providers),

which derive value from interaction or engagement with UK users. A UK user is defined as someone that is normally in the UK or is established in the UK. An additional clarification is the purpose test around the digital services activity. This is to avoid capturing businesses whose activities would fall within the digital services activity definition but where it is not their main purpose.

The draft legislation also clarifies that the three types of digital services activity include any ‘associated online advertising business’, which was not previously seen in the consultation document. Associated online advertising business means 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, search engine or online marketplace. It should also be noted that the UK targeted approach on particular types of digital businesses distinguishes from that of the OECD, which recognises and focuses on the tax challenges brought by digitalisation of the economy, instead of certain digital businesses.

The aforementioned three digital businesses will be liable to DST at a rate of 2 percent when the group’s worldwide revenues arising from digital services activity are more than £500 million and more than £25 million of these revenues are attributable to UK users in an accounting period. It should be noted that there is an allowance of £25 million, meaning that the first £25 million of the group’s worldwide revenue in respect of digital services revenue derived from UK users will not be subject to DST.

UK digital services revenues
The draft DST legislation defines digital services revenues that are attributable to UK users, including where advertising is being intended to be viewed by UK users, or where a UK user is party to a transaction taking place on an online marketplace. This includes transactions involving the sales or hiring of UK land or property on an online marketplace. Where a UK user is party to a transaction on an online marketplace, all the revenues generated will be treated as derived from UK users. In this regard, the UK Government introduced a relief to disregard 50 percent of the UK digital services revenue that will be charged from the transaction when the other user is located in a country that has a similar tax to the DST.

The ‘safe harbour’ election
In recognition of some in-scope digital businesses that may have a low or negative operating margin, the UK Government introduced a ‘safe harbour’ election that allows a group to elect to use the alternative basis of charge when calculating their DST liability. This should result in a lower rate of DST or nil DST liability applying to the UK digital services revenues.

Sunset clause?
Whilst the UK Government expressed its belief that the challenges brought by the digitalisation of the economy are best addressed by a sustainable long term solution that is agreed at the international level and is committed to dis-apply the DST once an appropriate international solution is in place, it is interesting to note that the draft legislation is silent about a sunset clause, which is one of the key recommendations suggested by the OECD for countries that adopt unilateral DST measures. The UK Government instead has committed to review the DST in 2025.

For further information please contact:


© 2021 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organisation please visit

Connect with us


Want to do business with KPMG?


loading image Request for proposal

Save, Curate and Share

Save what resonates, curate a library of information, and share content with your network of contacts.

Sign up today