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News release

Autumn Budget 2018: Wendy Nicholls – Taxing the digital economy

Wendy Nicholls, Partner, Tax

“Phillip Hammond’s announcement of a new 2% “digital services tax” moves the UK ahead of international bodies like the OECD, although it does follow the actions of some other countries such as Italy and Spain. The UK has argued that “user generated value” from so-called prosumers interacting with digital sites should be recognised and taxed in the relevant market. It was again emphasised that the tech giants are the key target here, not small businesses, in an effort to ensure that digital innovation in the UK is not quashed.

“Note that this is a turnover tax – a big shift from all the international tax standards, whereby corporate taxes are based on profits.

“However, although the chancellor has felt that progress has been slow on negotiating a new international tax agreement on digital platforms, it has been a surprise to many that he has ploughed ahead of the international consensus. We believe now is the very time for the UK to be working alongside other countries in a concerted way, rather than going it alone and we are encouraged to hear that the Chancellor will look to adopt a consensus solution from the OECD/G20 should one materialise, when they report again on the digitalisation of the economy in 2019.

“With the measure set to impact businesses with over £500 million in global revenues from from the provision of search engines, social media platforms and online marketplaces, and over £25m in the UK. The chancellor is keen to emphasise that it is not an online sales tax, and hopes that it falls on providers and not on consumers. The measure is due to be implemented in April 2020 and is forecast to raise £400 million per year, but with only £5 million set to be raised in the first year.

“Mr Hammond said that mid-sized businesses will not be affected by the new tax and has also provided that very small bricks and mortar businesses will be relieved from business rates for the next 2 years where their rateable value is £51,000 (or less) the business rate bill will be reduced by one third.

“The UK has to tread a fine line between being seen to be tough on multinationals and showing it is open for business, particularly as we prepare for a post-Brexit economy. One of the reasons that innovative businesses are attracted here is the combination of a stable tax regime and an even-handed approach. The UK has rightly prided itself on being at the forefront of international efforts by the OECD and G20 to tackle base Erosion and Profit Shifting (BEPS).

“It will be interesting to see how this develops as further details unfold”

Read our budget commentary