HMRC proceeding with digital services tax 'is disappointing'

Out-Law News | 26 Mar 2020 | 10:24 am | 1 min. read

UK tax authority HMRC will press ahead with its plans to introduce a digital services tax (DST) on businesses generating UK revenue from digital services activity from 1 April, despite the global coronavirus, or Covid-19, pandemic.

The UK's DST will be charged at 2% on the UK-derived revenue of social media platforms, search engines and online marketplaces. It will be payable by businesses whose global revenue from in-scope business activities is greater than £500 million and where more than £25m of that revenue is derived from UK users. Legislation to introduce the new tax was included in this year's draft Finance Bill that was published last week.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law, said: “It is very disappointing to see that, unlike other measures such as IR35, HMRC is going full steam ahead with the DST. It cannot just be a tax-grabbing exercise. Perhaps it is felt that the tax must come in to give the UK/US trade negotiation teams something to give away in those negotiations when they eventually happen."

"If so, it may be seen as heartless by those businesses which, at the very time digital spending will be increasing given Covid-19, are forced to engage in costly compliance measures getting to grips with a tax that may not, and hopefully will not, be with us for the long term. Instead they could be focusing resources on staying in business in troubled times."

Final guidance published alongside the legislation on how to apply the DST contains no mention of the Covid-19 pandemic or any special measures for digital services businesses whose revenues may be caught by the DST but may also be impacted by the global pandemic.

The Organisation for Economic Cooperation and Development (OECD) has been working on its own plans to change the international tax system to address tax challenges arising from the digitalisation of the global economy and effectively tax online economic activity. Work on this project continues amidst the Covid-19 pandemic, the OECD has confirmed. However, concurrently, the OECD is also looking to understand how the crisis impacts the project.

“There is a noticeable difference between HMRC’s approach and that of the OECD in light of the current crisis. While HMRC appears to be just ploughing ahead regardless, the OECD is calling for business input to understand how Covid-19 impacts its digital project, actively calling for concrete ideas around the impact it is having on the capabilities of companies to implement local new taxes while trying to save their businesses," said Walker.

"It has asked for input on what the consequences for the OECD’s project should be: suspension, a more narrow scope, or something else. In particular it wants input on whether businesses which are especially suffering in the crisis, such as consumer facing businesses, should be carved out altogether. Perhaps HMRC should be taking a leaf out of the OECD's book."