In April 2020, the government will introduce a new 2% tax on the revenues of online marketplaces, search engines and social media platforms which derive value from UK users.
Why has the government passed the new legislation?
The digital economy has developed significantly over the past couple of years and has brought a host of new benefits along with it. The government has passed the new tax legislation as it believes that there is a misalignment between the country where the profits are taxed and the country where the value is created. The digital services tax will ensure digital businesses who have operations in the UK and profit from UK users will contribute to supporting the UK’s public services.
The government has introduced the legislation as an interim action as it believes that the most sustainable long-term solution is to reform international corporate tax laws. The government has proposed to revoke the digital service tax when an appropriate global solution is in place.
How will the tax work?
If a company’s revenue exceeds more than £500 million in global revenues – more than £25 million of which are obtained from UK users – the company will be taxed at a rate of 2% on the revenues derived from UK users. The tax applies to social media platforms, search engines and online marketplaces. It will only be applied to revenues that are attributable to in-scope business models whenever the revenues are derived from UK users.
The legislation includes a safe harbour clause within its design. This allows businesses which are either making a loss or have very low-profit margins to elect to use an alternative calculation to determine their tax liability. The safe harbour ensures that the tax will not have a disproportionate impact on businesses sustainability and will only be used as a limited feature to ensure the legislation is proportionate.
The tax will be reported and paid on an annual basis – for more information visit the government’s website.
What is included in the scope of the legislation?
The legislation states that big-earning companies may be liable to pay the tax if they generate revenues that are attributable to UK users. A UK user is someone who is living in the UK or are normally in the UK. Businesses with activities inside and outside of the UK will need to separate their revenue reporting between in-scope and out-of-scope business lines.
Revenues can be linked to a UK user if any of the following apply:
- If payment is made by a UK user
- If the advert is targeted at a UK user
- If a UK user is involved in a cross-border transaction
The three business categories which the legislation focuses on are:
- Social media platforms – revenue is generated by monetising user engagement with the platform via user-generated content or interaction.
- Online marketplaces – revenue is generated through the sale of goods or services, users listing advertisements or revenue earned from user engagement with a website.
- Search engines – revenue is generated through advertising against search results, websites accessed via a search engine or where monitoring user data facilitates an increase in revenue.
Please note – there is an exemption for financial and payment services providers from the online marketplace definition.
Who is affected by the tax?
The thresholds mean that small businesses and start-ups should not be negatively impacted by the new legislation; the tax is aimed more towards global multinational giants. Whilst a 2% tax will not massively impact companies whose profits are high, low-margin businesses may not welcome the additional cost.
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