Many of those who set up a company with the assistance of London Registrars may be interested to learn more about the UK’s coming Digital Services Tax (DST), which – while not yet in force – is expected to apply from 1 April 2020 to profitable high-tech businesses making sales in Britain.

What is the Digital Services Tax?

First announced in the 2018 Budget, the DST is a new 2% tax that will be levied on the revenues of search engines, social media platforms and online marketplaces that derive value from UK users.

While the obvious targets for such a tax are American tech giants like Amazon, Apple, Google and Airbnb, examples have been found of other companies that are likely to be subject to the DST.

The European Commission was the first entity to propose a DST in response to the increasing digitalisation of the economies of the European Union (EU). However, the UK is set to become one of the first territories to implement the tax in its domestic legislation.

France has already approved a temporary DST, levying a tax of 3% on the turnover of companies with digital business in the country that have digital business models and revenues exceeding €750 million globally and €25 million in France.

Meanwhile, in the UK, DST will apply to qualifying firms for which a double threshold has been reached, of £25 million annual UK turnover and £500 million annual turnover worldwide. A 2% charge will be imposed on the UK revenues of the aforementioned ‘specific digital business models’ of search engines, social media platforms and online marketplaces.

Is your own company likely to be subject to this tax?

Those who have set up a company and are curious as to whether they may be affected by DST should note that it is applicable to revenues rather than profits. This differs from corporation tax protocols, where tax is charged on profits instead of turnover.

Put simply, a digital business that generates more than £500 million turnover worldwide is likely to find that its UK trade is within the scope of the DST; however, the first £25 million of its UK sales will be tax-exempt.

Will non-UK incorporated and/or non-UK resident companies be affected?

The UK’s approach to the new tax is narrower than that applied in France, with the provision of a social media platform, search engine and online marketplace being regarded as a taxable business activity for the purposes of DST.

A non-UK resident company providing digital services to its UK customers who use the company’s services online from the UK will therefore be within the DST’s scope in the same way as a UK-resident firm.

How are gambling businesses impacted?

In principle, it is thought that DST should apply to gambling businesses. This is in light of the European Commission specifically clarifying that neither online gambling nor gambling companies should be excluded from the legislative framework for DST.

Then, there is the matter of the UK, EU and US

The British government has said that it will only apply DST when an appropriate long-term solution – for example, an international agreement – is in place. However, it is far from certain as to when this may happen.

Finally, the strong opposition to the French DST voiced by US trade representative Robert Lighthizer – who complained that the tax unfairly targeted American firms – could also have very serious implications for the UK DST, perhaps even ultimately leading to the tax being abandoned altogether.

With the UK set to depart from the EU, hostility from Washington would seem especially pertinent as it is Lighthizer who the UK would need to negotiate with for a future trade deal.

Are you looking to set up  a company and benefit from the highest standard of business support services now and into the 2020s? If so, the London Registrars team would be happy to receive your enquiry about any area of our wide-ranging expertise.

9 September 2019