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The Digital Services Tax (DST) will apply to relevant revenues earned from 1 April 2020. DST is set at 2% of the revenues derived by a business from UK users of:
- social media platforms which promote interaction between users and have user content as a significant service feature;
- internet search engines; and
- online marketplaces which facilitate the sale of goods and services offered by third party users.
A UK user is defined as either an individual who is normally located in the UK or a business established in the UK. This may be different from the place where the user is located when the transaction is performed and businesses are advised to use evidence available to them to determine the likelihood that a user is normally located or established in the UK. Such sources of evidence can be delivery address, payment details, IP address, intended destination of advertising based on contractual evidence and the location of property or goods rented out. In case of conflicting evidence, the one most appropriate to determine where the user is normally located should be considered.
The digital services activities must generate 1. global revenues of more than £500mil in a year and 2. UK revenues of more than £25mil in a year. DST applies at a group level so all revenues from group businesses will be relevant.
A group member must register with HM Revenue & Customs on behalf of all group companies. In the event no group member is chosen, the registration obligation will fall on the ultimate parent company.
Registration for DST
Registration with HM Revenue & Customs must happen within 90 days of the end of the first DST accounting period.
The following details are needed to proceed with the registration:
- a contact person’s name, phone number and email address;
- start and end dates of the first accounting period for DST purposes;
- the Government Gateway user ID and password of the responsible (group) member;
- the ultimate group parent company’s name and registered office address, if registering a group.
In the event of group registration, a group company can be chosen to be the responsible member and represent the group to HMRC. If no responsible member is chosen, the ultimate parent company will automatically be the responsible member.
In order to proceed with the registration, the responsible member will need to confirm:
- its authorisation to act as the group’s responsible member;
- the ultimate parent company’s agreement to provide the information and resources it needs to meet its DST obligations.
After the registration is complete, the responsible member will need to:
- submit the group DST return;
- calculate any DST owed by the group;
- keep the group’s registered details up to date;
- deal with any enquires from HM Revenue & Customs about the group’s Digital Services Tax;
- keep and preserve records needed to deliver the group return until the sixth anniversary of the end of each DST accounting period or earlier if directed by HMRC
The Government Gateway user ID and password of the responsible member for the group or the company that wants to register if it is not part of a group will be needed to proceed with the registration with HM Revenue & Customs. Changes to registered details will have to communicated to HM Revenue & Customs within 90 days of the change.
Calculating the DST liability
A group or a company (not part of a group) will be able to assess any DST liability based on:
- the business activities the DST applies to;
- the total UK digital services revenues for the accounting period;
- the UK operating margins on those business activities.
In the event that the group is not electing to use the alternative charge to calculate the DST, the taxable amount for each activity can be calculated using the following steps:
- Identification of the group’s total UK digital services revenues in the relevant accounting period for that particular activity;
- The group’s net revenues from digital services activity are the revenues in step 1 less the £25 million annual allowance;
- The group’s total DST amount is 2% of the net revenues;
- The DST liability for each company in the group is the appropriate proportion of the group total DST amount, i.e. proportional to the amount of digital services revenue generated by that company compared to the rest of the group.
However, groups can elect to calculate their DST using the alternative charge which should benefit groups who make a loss or have a low UK operating margin on their digital services activities. The election applies per category of digital services activities.
In the event that a category includes more than one digital service activity, the steps should be for the total revenues and expenses of the activities in that category. The draft guidance refers to the example of three social media platforms where the calculation should be for the total revenues and expenses of all three social media platforms combined.
The alternative charge involves the following steps:
- Identification of the group’s total UK digital services revenues in the relevant accounting period for all taxable activities;
- Allocation of this amount between each category of digital services activity (i.e. social media platform, search engine and online marketplace);
- Apportionment of the £25mil annual allowance between the 3 categories of digital services activities by dividing the revenues found in step 2 by the total revenues in step 1;
- The group’s net revenues for each category of digital services activity are the revenues in step 2 less the proportion of the allowance at step 3;
- Calculation of the operating margin for each category of digital services activity subject to the election by deducting from the revenues at step 2 any relevant operating expenses incurred in relation to that category. The operating margin for that category is computed by dividing this number by the revenues in step 2;
- The amount of tax for each category of digital services activity the group elects to calculate under the alternative charge method is calculated using the following formula: 0.8 x the operating margin x the net revenues;
- The amount of tax for categories of digital services activities not subject to the election is 2% of the net revenues;
- The group’s total DST amount is the sum of the amounts at steps 6 and 7;
- The DST liability for each company in the group is the appropriate proportion of the group’s total DST amount, i.e. proportional to the amount of digital service revenues generated by that company compared to the rest of the group.
The draft guidance suggests that operating expenses/costs that can be taken into account when computing the operating margin include:
- cost of sales
- other operating costs
- amortisation and depreciation
whereas the following costs cannot be deducted:
- interest expenses
- expenditure on acquisitions
- changes in the valuation of assets
- tax costs, including the cost of the Digital Services Tax, which arise or occur in the normal course of business.
In the event a particular transaction involves a UK user and non-UK user in a country which also operates a Digital Services Tax, only 50% of the revenues from that transaction will be taxable as UK revenues so long as an appropriate claim is made.
The responsible member must keep and preserve records that enable the delivery of a correct and complete DST return. These records may include:
- transaction records;
- financial management reports;
- accounting reports;
- any other relevant documents or records used (e.g. evidence used to identify where users are normally located).
Contact our specialist team
- Cris Medori – Tax Director
- Tel +44 (0)20 7832 0444
Cris joined Wilson Wright after more than 20 years working in senior tax positions, both within industry and within the accounting profession.
He has significant experience advising on domestic, international and cross-border tax matters, acting as a trusted business adviser to his clients. He has a proven track record of working with business owners to provide holistic pragmatic solutions.
Cris’s areas of specialism include corporate planning, cross-border structuring and planning for high net worth individuals. He has extensive experience advising owner managed businesses, small and medium sized enterprises and start-ups, with a particular focus on the technology, property and fashion sectors.