On 8 November 2018 the UK government issued a consultation document on the proposed digital services tax. Comments are invited from interested parties before 28 February 2019.

As part of the budget proposals the Chancellor of the Exchequer announced that new Digital Services Tax would be introduced in April 2020. This tax was intended as an interim measure to deal with the challenges of taxing large digital businesses until a response to the issue is agreed at an international level. The consultation document covers the detailed design and implementation of the digital services tax. When finalised the legislation on the tax is to be included in the 2019-20 Finance Bill and the tax will take effect from April 2020.

In the consultation document the government notes that the proposed tax is based on revenues of the taxpayers and the government acknowledges concerns that this type of tax does not represent a sustainable long-term solution to the issue. The revenue-based tax has the aim of demonstrating the importance attached to the issue and helping to address the unfair taxation outcomes that will continue until an international solution is agreed.

The digital services tax will be narrowly-targeted as a 2% tax on the UK revenues of certain large digital businesses that derive significant value from the participation of their users. Companies will be taxed by reference to specific digital business activities that are considered by the government to derive significant value from users.

User participation is considered by the government to be the process through which users create value for some types of digital business by their online participation. The government puts forward examples that show how this value is created. Users create value through generation of content; depth of engagement, including content creation and engagement with other users; network effects and externalities, such as helping to build a large user network; and contribution to brand.

Business activities within the scope of the digital services tax will be the provision of a social media platform, search engine or online marketplace. The revenues generated by those taxable business activities will be subject to the tax where those revenues are linked to the participation of a UK user base.

A business will be subject to the tax if it generates more than GBP 500 million in global annual revenues from business activities that are within the scope of the tax; and generates more than GBP 25 million in annual revenues from business activities within the scope of the tax that are linked to the participation of UK users.

The digital services tax will not apply to the first GBP 25 million of UK taxable revenues. Also as a safe harbour provision businesses will be able to elect for an alternative calculation of their digital service tax liability. This safe harbour will help businesses with very low profit margins.

The tax will be allowed as a deduction in computing the profits for corporation tax purposes but it will not be credited against the corporation tax liability.

The paper examines various detailed issues such as the definition of in-scope activities; the attribution of revenues to the in-scope activities; and the definition of a UK user.