Digital Services Tax (DST)

Produced by Tolley

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Digital Services Tax (DST)
  • Background to DST
  • Overview of DST
  • Threshold for the application of DST
  • Digital services activities
  • Social media services
  • Internet search engine
  • Online marketplace
  • Associated online advertising business
  • Digital services revenues attributable to UK users
  • More...

Digital Services Tax (DST)

Background to DST

The Government announced at Budget 2018 that a DST would be introduced which seeks to match the amount of tax paid in the UK by digital businesses to the value derived from UK users. Legislation is included in FA 2020 and HMRC has issued a Digital Services Tax Manual.

For more detail see Simon’s Taxes D2.801.

Overview of DST

From 1 April 2020, a DST of 2% applies to revenues which are attributable to UK users and are from digital services activities that fall into the following three categories:

  1. a social media service

  2. an internet search engine

  3. an online marketplace

FA 2020, ss 43, 47

These three activities also include any associated online advertising business in relation to the activities; meaning a business which facilitates online advertising and also derives significant benefit from its association with the digital services activity.

There is a threshold below which the DST will not apply and a safe-harbour election for businesses with low margins or losses which are both detailed further below.

FA 2020 states that DST is charged on members of a group with this being defined as a GAAP group; therefore, DST can arise on revenues within a UK company as well as non-UK companies. For the purposes of DST, a single company would also be considered to be a group.

There are no specific rules concerning the interaction of DST with corporation tax and there is no credit relief for DST against any other taxes. Therefore, the normal rules on deductibility would apply, eg for a trading business, whether the expenditure was wholly and exclusively for the purpose of the trade. In addition, where digital services activities are spread throughout a group, the business may need to consider the impact of DST on any transfer pricing adjustments.

See ‘Analysis ― The UK’s digital services tax: what’s new’ by Michael Alliston and Judy Harrison in Tax Journal, Issue 1484, 14 (24 April 2020) for an overview of the DST

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