The U.K. digital services tax might be in effect, but it should be suspended to give companies grappling with the COVID-19 crisis some relief, a tech trade group representative said.
As the coronavirus emergency continues, the U.K. government is constantly reassessing what measures could be delayed, and the DST, which came into effect April 1, should be reconsidered, according to Neil Ross, policy manager for techUK.
In addition to “unprecedented” measures to support coronavirus-hit businesses, the U.K. government has postponed reforms to the IR35 off-payroll working rules for the private sector and delayed a key part of its Making Tax Digital for VAT initiative in response to the crisis.
“We would argue it would make sense, given the revenue nature of this tax, that it should be delayed until the following year and give companies a bit more breathing space,” Ross told Tax Notes.
The tax, first announced as part of the United Kingdom’s October 2018 budget, will apply to groups with consolidated worldwide digital services revenue exceeding £500 million and U.K. digital services revenue exceeding £25 million. Affected taxpayers will be subject to a 2 percent tax on U.K. digital services revenue arising from three types of services: social media services, search engines, or online marketplaces.
Draft legislation was published in July 2019. The first accounting period for an affected taxpayer would begin April 1 and end March 31, 2021, and the tax would be due on the day after the end of nine months from the end of the accounting period. Final draft DST legislation was published March 19 as part of Finance Bill 2020.
‘A Maximalist Approach’
The legislation sets out five cases in which revenues are attributable to U.K. users. Cases 1 to 3 respectively specify that the tax covers online marketplace revenues that 1) arise from marketplace transactions involving U.K. users; 2) arise in connection with accommodation or land in the United Kingdom; and 3) arise in connection with online advertising for goods, services, or other property that is paid for by a U.K. user.
Case 4 indicates the DST applies to online advertising revenues that don’t fall under cases 1 to 3 and relates to advertising that U.K. users view or consume. Case 5 sets out that the tax would affect revenues that aren’t described in cases 1 to 4 but also arise in connection with U.K. users.
“They’ve taken what I would call a maximalist approach,” Ross said. “It’s very much come as our worst-case scenario in the sense that it’s so broad. We could possibly see more companies brought into this than what we would have thought at the beginning.”
The latest DST legislation makes it clearer that websites selling or advertising property, online advertisers, and food delivery companies would fall under scope, which is a change from earlier draft legislation that appeared to target only social media providers, online marketplaces, and search engines, Ross said.
Now that the United Kingdom is in lockdown and is experiencing the worst economic effects of the pandemic, the tax will apply during a time when many businesses, even tech companies, won’t do well, so putting it off another year seems sensible, according to Ross.
While tech companies may be more resilient than other parts of the economy, some are going to lose profit, but will still have enough revenue to fall under the scope of the tax, Ross said. “They’ll end up paying more in a time when they’re losing profits, which is quite counterintuitive to how you’d expect the tax system to work,” he added.
Certainly, it’s disappointing that HM Revenue & Customs is still pushing ahead with the DST given the pandemic, according to Eloise Walker of Pinsent Masons LLP.
While the latest version of the draft legislation contains improvements, it still isn’t as clear as it should be, Walker said. “Much remains to be fleshed out in the guidance — for example, what is or isn’t within Case 5,” she told Tax Notes.
However, guidance doesn’t have the force of law, “so this legislation just reflects HMRC’s worrying trend to keep the legislation simple and leave themselves flexibility in how they interpret it,” Walker added.
The new legislation comprises minor changes, including an extra section about U.K. digital services revenues as they relate to accommodation and land, according to Walker.
The legislation has been helpful in clarifying who is covered when it comes to services connected to U.K. land, and ensures that the tax would apply to marketplaces like Airbnb and not other kinds of companies, according to Glyn Fullelove, president of the Chartered Institute of Taxation.
Moreover, the legislation ensures that financial services marketplaces trading financial instruments, which were never intended to be in scope, are clearly out of scope, Fullelove said. However, it’s not clear whether online gaming will be affected, so the guidance may provide further clarification, he added. Companies that are unsure about whether they fall under the scope of the DST should contact HMRC, either directly or through an organization like CIOT, Fullelove advised.
There are still many gray areas in the legislation, such as practical considerations for in-scope businesses, according to Walker. “HMRC remains of the mistaken view that companies can just push a magic button and all the necessary data will appear on screen to enable them to determine where their users are, how much revenue is attributable to digital services within scope, and how much is not,” Walker said. “That is not the reality.”
The DST is meant to be a “a rough and ready tax” that is supposed to be temporary pending a multilateral OECD solution to tax the digital economy, according to Fullelove. “We are encouraged that the government has said when a solution is reached at the OECD, it will fall away and the OECD solution will take its place,” he said. The legislation also confirmed that HM Treasury would review the DST before the end of 2025. However, CIOT would have liked to see a provision saying that the DST would last for a maximum of five years, he added.
An HM Treasury spokesperson told Tax Notes that there are no plans to suspend the DST, which was subject to significant consultation before it was implemented. The spokesperson also noted that although liability is starting to accrue, companies won’t have to pay the tax until 2021.
Finance Bill 2020 is sitting in Parliament while U.K. lawmakers take an early Easter recess, and is set to resume with a second reading on April 22. Walker said she expected the bill would be waved through after Easter. “Companies should not expect this to be frozen like the IR35 proposals but [they should] prepare now, if they haven’t already,” she said.