Just 18 taxpayers pay Digital Services Tax

The Public Accounts Committee (PAC) has published its report into the Digital Services Tax (DST). Whilst HMRC has raised 30% more tax revenues than expected, the tax still only accounts for one-twentieth of total tax revenues and was paid by only 18 taxpayers, with just five of these contributing 90% of the total.

• DST was introduced in April 2020 in an effort to capture the value generated by global digital businesses through UK user interaction. 
• Digital platforms include online marketplaces, social media outlets and search engines.
• The tax affects multinational groups with revenues from digital activities in excess of £500 million. At least £25 million must be derived from UK users.
• Any UK-based revenues over and above £25 million will be taxed at 2%.
• The tax was introduced as a temporary stop-gap until the OECD's Pillar One became operational. This rollout has suffered major setbacks and is not expected to be in place until at least 2024. The DST meanwhile is required to be reviewed by 2025.

The PAC report, highlights the following: 

• In 2020-21, £358 million was collected by HMRC through DST, 30% higher than anticipated. 
• The higher-than-projected collection may, in part, be due to the effects of COVID-19.
• 14 groups paid more than expected but 15 paid less or even nothing. Tax was paid by only 18 groups, with five of these contributing 90% of the total. 
• With all of this in mind, it is difficult to say whether the projected revenues of £3 billion by 2025 is accurate, without further analysis.
• HMRC also acknowledges that those caught by the tax can end up suffering double taxation where, with the DST levied on turnover, resulting activity profit is also subject to UK Corporation Tax and taxed for a second time.
• The Committee noted the opposition to the tax by the United States.

The report 'shines a welcome light' on DST according to the Chartered Institute of Taxation (CIOT), which has several concerns with the tax, not least that, its 'a blunt instrument' which will 'inevitably over-tax some companies and under-tax others':  it was only meant to be a stopgap. 

The CIOT nates that "While the Digital Services Tax brought in more than expected in its first year that was still just a twentieth of one per cent of the tax take in that year. Corporation Tax raised 150 times more and Income Tax 550 times more.... HMRC, the Government and the PAC should focus on improving HMRC service levels, which is now essential to the collection of revenue as well as to the health and prosperity of business and individual taxpayers, and not be tempted to pursue the illusion that deficiencies in delivering the major taxes can be made good by new taxes targeting tiny numbers of taxpayers, even if they are very large taxpayers."

CIOT's Institute's Director of Public Policy John Cullinane says the aim of the UK must be, "To repeal the Digital Services Tax once an appropriate global solution is in place". Both the PAC and the CIOT believe this review only highlights the pressing need for all parties involved in the OECD's Pillar One to come together to push this solution through. 

John notes a "bigger concern should be the reaction of the United States... " especially if the planned replacement, the OECD's Pillar One, is not implemented. "The US feels measures such as the Digital Services Tax unfairly target American companies and has in the past threatened retaliation against countries which adopt them."

The delays encountered by the Organisation for Economic Co-operation and Development (OECD) in trying to implement a measure requiring the cooperation of 140 member states could inadvertently lead to the life of this temporary tax being extended.  The fear is that an extension could give rise to problems 'in terms of incentives and compliance'. Those groups subject to the largest of liabilities may seek to mitigate these in a more aggressive manner if they believe that the tax is set to stay.

Useful guides on this topic

Digital Services Tax
The Digital Services Tax (DST) is a temporary mechanism to tax online sales pending a global solution. How does it work? Who is caught? 

136 countries agree to global Corporate Tax reform
The OECD has announced a far-reaching global agreement to its 'Two Pillar' proposal for international tax reform. The plans, which include a minimum in-country Corporation Tax rate of 15%, have now received the backing of all OECD members including G20 countries and the EU.

External links

PAC Report: The Digital Services Tax

CIOT Press Release: ‘Temporary’ Digital Services Tax risks becoming permanent, says CIOT