Background to the report
This investigation examines HM Revenue & Customs’ (HMRC’s) implementation of the Digital Services Tax (DST). The government introduced DST in April 2020 because it was concerned that the existing international tax system did not recognise the value being generated for digital companies through UK online users. DST is designed to tax business groups that derive large revenues from UK users of search engines, social media platforms and online marketplaces. It taxes the revenues (rather than profits) derived from these activities at a rate of 2%.Jump to downloads
The DST is levied on business groups (groups of companies with the same controlling interest) rather than each individual company. Groups are liable to pay DST if their worldwide revenues from in-scope activities are more than £500 million and more than £25 million are derived from UK users. A group’s first £25 million of UK revenues are exempt from DST.
Historically taxes on corporations have been levied based on the location of the profit-making activity of a company, but the internet enables companies to generate revenues without being physically located in the UK. The UK is among many other countries seeking a multilateral solution to concerns about how the international tax system operates for multinational companies. The Organisation for Economic Co-operation and Development (OECD) and G20 are leading work with around 140 countries and tax jurisdictions under an ‘Inclusive Framework on Base Erosion and Profit Shifting’ project to reform international tax rules
The UK government intends to retire DST once ‘Pillar One’ of the OECD reforms is introduced in the UK. Pillar One is expected to re-allocate some taxing rights over the largest and most profitable multinational business groups from their home countries to the tax jurisdictions where their customers and users are located. In July 2022 the OECD announced that the multilateral convention which will implement Pillar One globally will be open for jurisdictions to sign in mid-2023, with the aim of the Pillar One reforms coming into force in 2024. Separately, ‘Pillar Two’ will introduce a global minimum corporate tax rate.
Scope of the report
This investigation reports on how DST is operating following the first year of its implementation. This report sets out:
- what are DST and the OECD reforms and why they are happening;
- the impact of DST in its first year; and
- how HMRC has managed the risks of non-compliance with the tax by companies within its scope, and what lessons it has learned.
The report does not provide details about the tax paid by individual business groups, since this would violate taxpayer confidentiality. The report does not seek to examine and report on the value for money of HMRC’s administration of DST at this early stage in its operation, but it does make recommendations to support its implementation.
Big digital companies are paying more UK tax, and the Digital Services Tax (DST) is part of this. HMRC collected 30% more revenue through DST than originally forecast for its first year, around 90% of which was paid by five business groups. DST accounted for 7% of the total amount of tax paid by business groups within scope for the tax. Other taxes paid by these business groups grew by 34% between 2020-21 and 2021-22, due to increased sales during the COVID-19 pandemic and new VAT rules on imported goods.
HMRC has yet to identify any non-compliance and it is not yet clear if HMRC has captured all groups that should be within scope for the tax. HMRC could still face challenges ahead with enforcing compliance, especially among groups without a physical presence in the UK. It will need to manage a larger population of business groups across a wider range of business activities than it initially expected. HMRC will need to ensure good levels of compliance to maintain DST as a credible alternative until the OECD Pillar One reforms come into effect.
- Report - Investigation into the Digital Services Tax (.pdf — 476 KB)
- Summary - Investigation into the Digital Services Tax (.pdf — 198 KB)
- ePub - Investigation into the Digital Services Tax (.epub — 2 MB)
- ISBN: 978-1-78604-454-9 [Buy a hard copy of this report]
- HC: 905 2022-23
View press release (23 Nov 2022)