The UK Budget announcements on 29 October 2018 included a proposed new tax on large digital services companies such as search engines, social media platforms and online marketplaces. The tax would take effect from 1 April 2020.

The digital services tax would be targeted specifically at the large tech giants with global revenues of more than GBP 500 million per year and would only apply to companies that are profitable. The tax would be charged at 2% on the UK revenues of these companies.

The Chancellor of the Exchequer stated that the large digital companies represent a challenge to the sustainability and fairness of the tax system. He noted that the tax rules have fallen behind reality and do not take into account the changing business models in the digital economy. In his view it is not sustainable or fair that digital platform businesses can create significant value in the UK without paying tax in relation to that business.

The UK will continue to work with the OECD and G20 to introduce a tax on digital companies at the international level and this is considered to be the best long-term solution. However consultations aimed at moving this forward internationally have been too slow.

The introduction of the digital services tax in the UK has been delayed until 1 April 2020 to allow time for further international discussion. If a way forward is agreed at the international level before that date the UK could adopt any international measures agreed in place of the current proposed tax. The digital services tax will apply until the time that an alternative international tax is agreed.

There will be consultation on the details of the measure before the legislation is finalized. The wording will need to be drafted carefully to ensure that UK tech start-ups are excluded. If the digital services tax is drafted correctly it could create more of a level playing field for small and medium sized tech enterprises.