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Warning to investors as digital services tax looms

Emma Lunn
Written By:
Emma Lunn

HMRC has announced a new 2 per cent tax on web firms with a UK presence.

From April 2020, the government plans to introduce a new 2 per cent tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users.

Consultations on the draft legislation will run until 5 September, with measures included in the next Finance Bill.

The digital services tax will only apply to companies with worldwide revenue of more than £500m of which in excess of £25m is derived from UK customers.

So those running start-ups or small businesses or who operate at a loss will not be asked to pay.

The government predicts the tax will add £275m to the public coffers in the coming financial year, assuming it is comes into effect as planned in the 2020 budget, rising to £440m by 2023. It will cost an estimated £8m for additional staff, IT facilities, and administrative overheads.

Jesse Norman, financial secretary to the Treasury and Paymaster General, said: “The UK has always sought to lead in finding an international solution to taxing the digital economy. This targeted and proportionate digital services tax is designed to keep our tax system in this area both fair and competitive, pending a longer term international settlement.”

This week also saw the French government approve a new tax that will see large technology companies pay a tax of 3 per cent on local revenue. It will apply to firms with global sales of over £674m and those that make more than £22.5m a year in France.

The introduction of the French tax has been met by criticism from the US with President Trump viewing the tax as an attempt to neuter US firms.

Adrian Lowcock, head of personal investing at Willis Owen, said: “Although the US may politically baulk at technology taxes they look to be inevitable, with the UK and France leading the way. The tax rates may seem low but investors should remember that they are on revenues, not profits, as technology companies have become experts at booking profits in low tax jurisdictions.

“Markets have been pricing some tech giants for perfection – namely that they will continue to grow at the same rate indefinitely, will become masters in any market they choose to compete in, and will see profits rise inexorably. However, there are always risks for any business and the more profits you make the greater some of those risks become. As tech giants become ever larger and generate more GDP than some countries, governments will step in to regulate and tax them where competitors do not, or cannot, keep them in check.”