After much speculation, UK Chancellor Philip Hammond announced today in his annual budget speech that the UK will introduce a Digital Services Tax (DST) with effect from April 2020. In doing so, the UK has followed the example set with its Diverted Profits Tax by taking unilateral action first, and pre-empting possible EU and OECD proposals for a similar measure. This is despite stern criticism from the US Treasury and various quarters in business.

The new tax will be applied at a rate of 2% to UK revenues derived from search engines, social media platforms, and online marketplaces. It will hit all groups with global revenue derived from these sources in excess of £500m per year, but make a number of concessions, presumably to address concerns raised widely (including in this blog)about its effect on innovation, start-ups and competition. Loss-makers will be exempt, and measures introduced to reduce the effect on very low margin business. There will also be a (presumably tax free) annual allowance of £25 million.

Curiously, the proposals appear not to catch ordinary online business, or content providers. However, as with the Diverted Profits Tax, the devil will be in the final detail. The UK government will consult before legislating, and notes its commitment to G20 and OECD discussions about wider reforms to the international tax system. As such, the new tax  is temporary. It was the same with income tax in 1842.

Whilst the announcement will, no doubt, be applauded and criticised in equal measure, the UK Government does appear to have listened to (some) concerns. It is also proposed at a lower rate than the 3% originally mooted, or the 5% rate that the European Parliament would like. Whether it puts pressure on the EU to follow suit is a good question, but it will no doubt raise hackles in the US. It might even be a bargaining chip in post-Brexit trade talks.

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