Out-Law Guide 8 min. read

The UK's digital services tax (DST)

The UK's digital service tax (DST) imposes a 2% tax on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces to the extent that their revenues are linked to the participation of UK users.

DST applies regardless of where the corporate owner of those revenues is located and irrespective of the physical presence that the corporate has in the UK. It applies to revenue earned from 1 April 2020.

At the request of the G20, the Organisation for Economic Co-operation and Development (OECD) is considering changes to the international tax system to address the challenges of the digitisation of the economy. It hopes to reach international consensus on its proposals by mid 2021. DST was introduced as an interim response to challenges that the digital economy poses for the international corporate tax framework.


DST is targeted at large businesses that generate, within a 12-month accounting period, more than £500 million in global digital services revenues and £25m in UK digital services revenues.

Only in-scope revenues exceeding £25m which are derived from UK users are subject to DST.

Digital services activities

A group will only be in scope of DST if it generates revenues from 'digital services activities'. These are the provision of:

  • a social media service,
  • an internet search engine, or
  • an online marketplace.

The definition also includes the carrying on of an online advertising service that is associated with any of these activities.

In guidance it has issued, HMRC has confirmed that services which are only provided to members of the same group do not need to be considered for DST. HMRC has given the example of a social network that is only used in a single organisation to allow its employees to share information and is not sold to or accessed by third parties.

Activities which do not have an independent business purpose and are predominantly provided to support or improve a wider business activity are unlikely to qualify as an online service in their own right and do not need to be tested against the DST definitions, according to HMRC's guidance.

Social media services

The definition of a 'social media service' is intended to cover businesses that rely on an active and engaged user base to create value. An online service will meet the definition when:

  • the main purpose, or one of the main purposes, of the service is to promote interaction between users, including interaction between users and user-generated content; and
  • a significant feature of the service is making content generated by users available to other users.

According to HMRC guidance, social networking sites, professional networking sites, micro-blogging platforms, video or image sharing platforms, online dating websites and platforms that primarily exist to share user reviews will typically be covered by the social media services definition.

Internet search engines

The legislation does not define an internet search engine. According to HMRC guidance, the term can broadly be applied to an online service whose core purpose is to allow users to search for webpages or information across the internet.

A search facility on a website which allows a user to search the material on that website is not an internet search engine and will not be in scope of DST.

Online marketplaces

The online marketplace definition is intended to cover online services which provide an online market for goods, services and other property by connecting users seeking something with other users who are willing to provide it. 

It is not intended to cover the online sales of e-commerce retailers or online sales generally. It only covers cases where the business acts as an intermediary and matches buyers and sellers, rather than where the business is selling its own goods or services.  

There are two parts to the online marketplace definition which must both be satisfied for an online service to fall in scope:

  • the service enables users to sell particular things to other users, or to advertise or otherwise offer to other users particular things for sale; and 
  • the main purpose, or one of the main purposes, of the service is to facilitate the sale by users of particular things. 

It does not matter whether the online service facilitates business to consumer (B2C), business to business (B2B) or consumer to consumer (C2C) transactions. 

Calculating digital services revenues

To calculate a group's liability to DST, it is first necessary to determine a group's total, worldwide revenues from digital services activities. These are called its 'digital services revenues'.

Where a group's digital services revenues exceed £500m for an annual accounting period, it will be subject to DST on the amount of those revenues which are attributable to UK users, known as 'UK digital services revenues', less an annual £25m allowance.

A group's 'UK digital services revenues' for a period are the amount of its digital services revenues for that period that are attributable to UK users.

A user is anyone that uses the digital service activity, subject to some limited exceptions. A user can be an individual or a legal person such as a company.

UK users

A UK user is defined as one who it is reasonable to assume is an individual normally in the UK, or for a business it is reasonable to assume is a user established in the UK.

For an individual, the question is where they are normally located, not where they are located at the time of the transaction. The legislation does not define 'normally in the UK' and this is stated in the guidance as not equivalent to residence, domicile or citizenship. It is where the 'user is located most of the time' and will usually be where they live.

For businesses, the test does not rely on concepts such as residence, permanent establishment or fixed establishment. This is because it is the group carrying on the digital services activities which has to work out which are its UK users and it may only have limited information about its users.

The 'reasonable to assume' test is intended to prevent groups from needing to obtain more information from users than they collect in the course of their commercial activities. According to the HMRC guidance, this is effectively a test of probability. A user will be a UK user when it is more likely than not they are normally located in the UK. This judgement should be made based on the information available to the group. HMRC has said it will be a reasonable assumption when a reasonably informed and independent person would reach the same conclusion based on that evidence.

Evidence the provider of digital services activities may have about the location of its users includes the delivery address, payment details, IP address, the intended destination of advertising based on contractual evidence and the address of property or location of goods which are rented out.

Annual allowance

There is an annual allowance on the first £25m of UK digital services revenues so that DST is only payable to the extent that UK revenues exceed this threshold.

Rate of DST

DST applies at a rate of 2% on UK digital services revenues above the annual allowance. It is a tax on revenues and not profits.

Alternative basis of charge

Groups which are loss making or operating at a low margin on their UK digital services activity can elect to calculate their DST liability using an alternative basis of charge.

Under the alternative basis of charge, the DST tax rate is calculated by reference to the UK operating margin of the digital services activity. It will also ensure that where the UK digital services activity is loss making, no DST needs to be paid on revenues attributable to that activity. 

This election is voluntary and is applied against each digital services activity individually. If a business has more than one in-scope digital services activity it can choose to apply the alternative basis of charge to just one of the activities, but if it elects in relation to more than one activity the alternative basis of charge will be calculated separately for each activity. The £25m annual allowance is apportioned to each type of digital services activity in the proportion of DST revenues attributable to each type of digital services activity.

The following example, contained in HMRC guidance, helps illustrate the application of the alternative basis of charge:

Business Z provides a social media platform which generates £125m of DST revenues. Under the standard DST calculation, after deducting the £25m allowance, its DST liability would be £2m.

The social media platform's operating costs from providing the service to UK users are £123.75m. Its operating margin is therefore 1% (125-123.75/125). If the group paid the full rate of DST, it would make a loss from providing the social media platform to UK users. It therefore elects to calculate its DST under the non-standard rate calculation.

Its DST liability is reduced to £0.8m, which is calculated as £100m (the DST revenues less the allowance) multiplied by the 1% operating margin multiplied by 0.8.

Cross-border transactions

In the case of cross-border transactions the revenues may be linked to both a UK user and a non-UK user. All the revenues from the transaction will be UK digital services revenues. However, some relief is available where the revenues arising from the transaction are also subject to a foreign DST charge.

If a group makes a valid claim, its UK digital services revenues arising from qualifying online marketplace transactions are reduced by 50%.

Interim measure

Although DST has been expressed by the UK government to be an interim measure until there is an internationally agreed solution to the challenges the digital economy poses to the international tax system, there is no 'sunset clause' in the legislation bringing the regime to an end at a particular time. However, the government has announced that there will be a review of DST by HM Treasury before the end of 2025, which will be laid before parliament.

US challenge

In January 2021 the US Trade Representative's Office claimed that the UK's DST discriminates against US digital companies, is inconsistent with the principles of international tax and burdens or restricts US commerce. It made similar findings in relation to the DSTs introduced by France, Austria and Spain. The previous US administration threatened to impose 100% tariffs on selected imports from countries that press ahead with DSTs.

Corporation tax deduction

DST will be deductible from a company's profits for corporation tax purposes on normal principles. HMRC has said in its DST manual that a company's DST expense is directly related to the earning of its revenues and is a legal obligation of performing that trade and so in most cases it is likely the expense will have been incurred wholly and exclusively for the purposes of the trade.  


DST is payable for an accounting period. The first accounting period began on 1 April 2020 and usually ends on the company's accounting reference date. Subsequent accounting periods will usually align with the company's normal accounting periods.

DST considers the activities and revenues of a group, but the liability will be upon the individual entities within the group that receive the revenues. The charge is allocated to the individual members of the group that recognise the UK digital services revenues, in the proportion of their contribution to the group's total UK digital services revenues.

To simplify administration of the tax, a single entity in the group – the responsible member – is responsible for dealing with all aspects of administration relating to DST with HMRC. By default, the group's ultimate parent entity will be the responsible member. However, it is possible to nominate another company within the group to be the responsible member.

The responsible member is required to submit a DST return to HMRC within 12 months of the end of the first accounting period in which the threshold conditions have been met. Once the threshold conditions have been met the responsible member must continue to submit a return for each subsequent accounting period unless HMRC has given a direction that a return is not required. DST is payable within nine months and one day from the end of the accounting period.

For more information see HMRC's DST manual.

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