The UK Digital Services Tax: Now a reality

The UK Digital Services Tax: Now a reality

The Finance Bill 2020 includes the final provisions of the UK’s Digital Services Tax.


Partner, Deal Advisory Tax, Corporates Lead

KPMG in the UK


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On 19 March 2020 the Government published Finance Bill 2020 which includes the final provisions of the UK’s much-anticipated Digital Services Tax (DST). Chancellor Rishi Sunak was silent on the DST during the Government’s Budget speech on 11 March, however, the 2020 Budget Red Book had confirmed that the DST would be effective from 1 April this year (notwithstanding earlier speculation that the tax might have been delayed or scrapped). The Bill now confirms many of the provisions of the draft legislation published last year, such as the 2 percent rate of tax; the revenue thresholds; the available relief for certain cross-border transactions and low-margin or loss-making activities; and the date by which DST is due and payable. There are some welcome clarifications and confirmations around scoping and compliance. The Government also published Explanatory Notes alongside the Bill as well as a Manual, which provide further detail on the DST.
The DST, effective from 1 April 2020, will see a 2 percent tax be levied on UK digital services revenues – arising in connection with certain types of digital activity – that are attributable to UK users. The in-scope digital services activities are:
  • Social media services; 
  • Internet search engines; and
  • Online marketplaces.

If an activity is ancillary or incidental to an in-scope digital services activity, its revenues may also be subject to the DST.

The thresholds remain unchanged from the draft legislation. A group will be liable to the DST when:

  • Its annual worldwide revenues arising from relevant digital services activity exceed £500 million; and 
  • More than £25 million of these annual digital services revenues are attributable to UK users.

Clarifications around scoping

The Bill provides some useful clarifications around scoping, particularly on what may be considered to not fall within scope of certain definitions. For instance, for the purpose of determining in-scope search engine revenues, a facility that only searches material on a single website (or closely related websites) is not itself considered to be a ‘search engine’. This is welcome clarification for businesses, including certain e-tailers.

The law has also replaced the phrase ‘social media platform’ with ‘social media service’, and now requires that “making content generated by users available to other users” is a ‘significant’ feature of the service, seeming to underline the Government’s stated policy objective that the DST should apply where businesses generate significant value from their UK user base.

The Bill also clarifies that a ‘UK user’ does not include a UK employee of a business - confirming that, for example, internal company social media platforms such as messageboards for employee use should fall firmly out of scope of the DST provisions.

The Budget 2020 Red Book noted that the Government would be reviewing how the DST legislation applies to marketplace delivery fees, and whether it is consistent with the policy rationale of the DST. This has not been addressed by the Bill or the Explanatory Notes. We await further developments over the coming months.

Financial services exemption

One of the main amendments from the draft legislation was a change to the proposed exemption for financial services providers. Previously, an exemption was tabled to exclude online marketplaces if they were provided by a financial services provider with more than half its relevant revenues arising from the trading or creation of financial assets. A ‘financial services provider’ in this context was specifically defined and linked to regulatory approvals.

With the previous definition now removed, the Bill states that the exclusion now applies to a marketplace that, for the time being, derives more than half of the relevant revenues from the facilitation of the trade of financial instruments, commodities or foreign exchange. The trading of financial instruments includes the creation of the instruments, which HMRC have confirmed in their published guidance ensures that peer-to-peer lending and some insurance businesses are covered by the exemption.


The Bill confirms that the due date of the tax is the day after nine months following the end of the accounting period. Thus, a company with an accounting period that ends on 31 December 2020 (which falls within scope and is chargeable to DST in terms of the final law) is to make its first payment of DST on 1 October 2021.

Future review

The Bill does not include a hardwired ‘sunset’ clause that would automatically repeal the DST at a specific date in the future. This is in line with the Government’s continued stance in relation to the DST since it was originally mooted (as reaffirmed in the Red Book, where the Government confirmed that it is committed to repealing the tax once satisfactory multilateral measures are implemented through the OECD’s work on the digitalisation of the economy). The legislation does however retain the Treasury’s commitment to ‘review’ the DST in 2025.

We will provide you with further information on the new HMRC manual that provides further explanations on the structure and details of the DST, in the coming weeks.

For further information please contact:

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