The Chancellor. Philip Hammond has outlined plans to charge the big technology companies a digital sales tax.  The tax could come into effect from April 2020 and will force companies to pay tax on the sales they generate in the UK.

He said, “established tech giants” will be targeted rather than start-ups.

There has been criticism for some time about the small amount of tax companies such as Amazon and Facebook pay in the UK.

digital tax
2% digital tax planned for tech giants.

The European Commission and the 36 member OECD have been trying to come to some agreement over imposing a digital tax on internet marketplaces, search engines and social media platforms.

However, Mr Hammond said that progress was “painfully slow”.

He said: “It is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here.”

The chancellor is proposing to introduce a 2% tax rate against any sales that such large companies make in the UK.  These companies only pay taxes on UK profits, at the moment, making it a much smaller figure that it would be on revenues.

Treasury forecast figures.

The forecast from the Treasury is that the tax will generate £275m in 2019-20, rising to £370m in the following year.

It then expects that digital services tax receipts will reach £400m in 2021-22 and £440m the year after.

Mr Hammond said that the digital services tax would be imposed on companies that are profitable and generate “at least £500m a year in global revenue”.

Although he did not name them, US technology giants Amazon, Google and Facebook have been criticised for the relatively small amount of tax they pay in the UK.

Mr Hammond emphasised that start-ups would be protected from the levy.

However, Julian David, chief executive of industry body TechUK, said the proposed £500m threshold was “low” and “and risks capturing much smaller companies than anticipated”.

“This approach risks undermining the UK’s reputation as the best place to start a tech business or to invest,” he added.

Although the Chancellor is looking at starting the new levy in 2020 ,it may not even go ahead if Europe moves ahead with its own digital levy which would tax firms at a 3% rate.

Zubin Patel, corporate tax partner at accountancy firm Deloitte, said: “There will be further consultation on the detail of the proposal, which is temporary and subject to formal review in 2025.”

The Treasury also said earlier this year that a levy on digital companies’ UK sales would be implemented until an international deal could be reached.

International consultations taking a long time.

The OECD intends to provide an update on its plans in 2019 with the aim of producing a final report the following year.

Chris Sanger, head of tax policy at accountancy firm EY, says the fact that Mr Hammond has committed to reviewing the UK digital services tax in 2025 indicates “that he thinks that it may take quite a while for the OECD to gain any consensus on the international stage”.

Whilst the government have talked many times of imposing a digital tax on tech giants, the problem has been designing it so that it doesn’t stifle innovation from new firms, as well as co-ordinating action with other countries so that businesses aren’t put off investing in the UK.

The chancellor also hopes that by 2020 when the tax is due to be introduced a global agreement on a tax on digital turnover will have been agreed.

That may be optimistic according to the trade body TechUK, which warns that going it alone would be costly.

But there is in any case still plenty to be sorted out about how the new tax will work – and whether it can be as precisely targeted as the Treasury seems to think.

The chancellor will be hoping that an international agreement rides to his rescue before the UK tax has to be imposed.

Laurence Field, corporate tax partner at advisory firm Crowe UK, said that global firms “don’t have votes, so are an easy target”.

“Playing tough with the digital services tax is politically attractive even if this causes conflicts with other tax jurisdictions,” he said.

However, the move could risk provoking the US at a time when the UK is trying to forge closer trade links before Brexit.

Dan Neidle, a tax partner at law firm Clifford Chance, said: “Given the dominance of the US tech giants, it is hard to see the Trump administration taking kindly to the digital sales tax as the UK sets out its stall for the best possible trade deal with the US.”