Chancellor Philip Hammond has launched an attack on tech giants such as Amazon and Google by announcing a 2% UK Digital Services tax from 2020.
In today's Budget, Hammond said digital tech giants will be taxed 2% on the money they make from UK users. It is expected this will raise £400m per year, some £1.5bn over four years.
Subject to consultation, the 2% tax will be applied to "specific digital business models where their revenues are linked with the participation of UK users".
This includes search engines, social media platforms and online marketplaces where the business derives "significant value" from the participation of users.
Businesses will need to generate revenues from in-scope business models of at least £500m globally to become taxable under the DST. The first £25m of relevant UK revenues are also not taxable, meaning smaller start-ups are not included.
The DST will apply to the revenues that are attributable to in-scope business models whenever they are linked to UK users. This means that, for the purposes of the DST, what matters is the location of the user, not the business.
For example, if a social media platform generates revenues from targeting adverts at UK users or a marketplace generates commission by facilitating a transaction between UK users, the government will apply a 2% tax to those revenues
A consultation on the design of the tax will be launched in the coming week and the tax will be legislated for in the 2019/2020 Finance Bill and apply from April 2020.
It will be subject to formal review in 2025 to ensure it is still required following further international discussions.
Reacting to the news, Ben Barringer, equity analyst at Quilter Cheviot, said: "Most technology companies only break down their revenues into US and non-US, so it is difficult to get a sense of the exact impact any UK tax could have.
"A sensible estimate of UK exposure for companies like Alphabet (Google), Amazon and Facebook might be between 5%-10% of revenues however. So while the UK is more important than many other non-US markets, it still only accounts for a small percentage of their revenues and many technology companies are already domiciled in low tax jurisdictions like Ireland or Luxembourg.
"Over the short to medium term then, higher tax rates do not appear to be a threat to the technology sector. As seen in recent days, companies like Alphabet and Amazon continue to generate strong earnings growth and benefit from structural changes in the economy.
"It is these areas which investors should focus on, rather than changes to tax regimes which are unlikely to have a serious impact on profits for several years."
Tim Bennett, partner at Killik & Co, said: "Fiscal Phil's only real Budgetary firework is the announcement that the UK is prepared to go it alone with a digital sales tax from April 2020, in the absence of an international agreement on this issue.
"Setting Britain on a solo collision course with some of the world's biggest technology companies may be interpreted as either brave, or a little foolish."
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