Danny McCance 30 Oct 2018 02:11pm

Budget 2018: questions over digital services tax

In yesterday’s Budget, the chancellor announced the long-awaited tax, aimed at making large tech companies “pay their fair share”

The 2% tax will target businesses that generate revenue through search engines, social media platforms and online marketplaces, generate more than £500m globally a year and are profitable.

This, according to the Treasury, is “to ensure that the amount of tax paid in the UK is reflective of the value they derive from their UK users,” and is expected to raise £440m by 2023/24.

It will encompass the likes of Apple, Amazon and Google, all companies that have faced public and political anger over the amount of tax they pay in the UK.

Hammond emphasised that this was not a tax on products bought online, as that would unfairly affect the consumer, and that start-ups would not be left to “shoulder the burden of this new tax”.

Read all the news, analysis, and comment on this year's Budget here

However, Stella Amiss, head of tax policy at PwC, thinks it may not be as cut and dry as Hammond is making out.

”Working out who is taxed and who isn't in the digital economy is no mean feat when all businesses operate in an increasing technological world,” Amiss said.

Kevin Nicholson, head of tax at PwC, said it is “merely a sticking plaster over the cracks of a system that needs a fundamental reform to keep pace with modern ways of working and doing business.”

Chris Sanger, head of tax policy at EY, agreed. “Caught up in the disputes between governments, business face the risk of double taxation and complex rules,” he said.

“That isn’t the best environment to encourage innovation at a time when the chancellor is looking to the digital sector to boost the economy,” he added.

Frank Haskew, ICAEW head of tax, said that the tax “can only work in the short term” and that a longer-term solution is needed.

“There also needs to be some serious consideration to address the big firms’ threats to withdraw investment following Brexit and as a result of the tax – this will be a tough balancing act,” Haskew said.

In announcing the new tax, Hammond broke away from global competitors, but did indicate that the new announcement might only be a placeholder until a multilateral agreement is reached.

He said the government will continue to work with the OECD and G20 to reach a solution and if agreed upon it would “consider adopting it in place of the UK digital services tax”.

“The chancellor would much rather hand responsibility in this area back to the G20 and OECD, who are working on a global solution, so this tax might never see the light of day,” said Brian Palmer, tax policy expert at the Association of Accounting Technicians.

Laurence Field, corporate tax partner at Crowe UK, said the tax “makes sense.”

“Playing tough with the digital services tax is politically attractive even if this causes conflicts with other tax jurisdictions. It is unlikely such measures will find much opposition in Parliament given the ground has been well prepared.

“How our trading partners (and particularly the US) react will be the real challenge. Retaliatory measures will not help the British economy,” said Field.

Amazon and Facebook were not available to comment. Google and Netflix have been contacted for further comment.