The UK government on 19 March 2020 published Finance Bill 2020 that includes the final provisions of the UK’s digital services tax.
The digital services tax would be effective from 1 April 2020.
Many provisions from the draft legislation (published last year) would continue, including the 2% 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 digital services tax would be due and payable. Clarifications and confirmations concerning the scope and compliance are provided, and explanatory notes provide further details.
The digital services tax, effective from 1 April 2020, provides for a 2% tax to 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:
If an activity is ancillary or incidental to an in-scope digital services activity, its revenues would also be subject to the digital services tax.
The thresholds remain unchanged from the draft legislation. A group would be liable to the digital services tax when:
Clarifications of scope
The Finance Bill 2020 provides some clarifications concerning the scope of the services subject to tax, 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.”
The phrase “social media platform” has been replaced 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 digital services tax is not to apply when businesses generate significant value from their UK user base.
The Finance 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 message-boards for employee use would fall firmly out of scope of the digital services tax provisions.
The Budget 2020 “Red Book” noted that the government would be reviewing how the digital services tax legislation applies to marketplace delivery fees, and whether it is consistent with the policy rationale of the digital services tax. This has not been addressed by the Finance Bill or the explanatory notes.
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 would have excluded 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 Finance 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 HM Revenue & Customs confirmed in published guidance to provide that peer-to-peer lending and some insurance businesses are covered by the exemption.
The Finance 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 digital services tax in terms of the final law) is to make its first payment of the digital services tax on 1 October 2021.
The Finance Bill does not include a hardwired “sunset” clause that would automatically repeal the digital services tax at a specific date in the future. This is in line with the government’s continued stance in relation to the digital services tax because it was originally mooted (as reaffirmed in the Red Book, in which 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 digital services tax in 2025.
Read a March 2020 report prepared by the KPMG member firm in the UK