DST01400 - Background to DST

Digital Services Tax (DST) was included in Finance Bill 2020 and applies to revenue earned from 1 April 2020.

The introduction of DST was first announced at Autumn Budget 2018 as an interim response to challenges that the digital economy poses for the international corporate tax framework. The Chancellor of the Exchequer said:

“The rules have simply not kept pace with changing business models. And it’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business.

The UK has been leading attempts to deliver international corporate tax reform for the digital age. A new global agreement is the best long-term solution. But progress is painfully slow. We cannot simply talk forever. So we will now introduce a UK Digital Services Tax”.

The genesis of the tax can be found in earlier Government Position Papers on the corporate taxation of the digital economy, published in November 2017 and March 2018. These papers set out that the Government continued to support the underlying principle of the international corporate tax framework, that the profits of a business should be taxed in the countries in which it creates value, but that there were concerns with how this principle applied in practice.

The Government said that this principle was being challenged by certain digital business models that generate value through the engagement and participation of an active user base. The Government highlighted that this value was not being recognised by the international tax rules that allocate profits. The position papers therefore argue for reforms to the international corporate tax framework to take account of the ways in which users create value for certain digital businesses.

These papers also set out the potential for the Government to introduce an interim Digital Services Tax to address these concerns until a comprehensive global solution is in place.

Since the UK DST was first announced, work at the Organisation for Economic Development (OECD) exploring potential reforms to the international corporate tax framework has moved closer to finding a sustainable long-term solution. However significant work remains to be done until a solution can be found.

The Government continues to believe that long-term reforms are the most sustainable solution to the challenges posed by digitalisation to corporate taxation and has committed to disapplying the DST once an appropriate long-term solution is in place.

There will be a review of DST by HM Treasury before the end of 2025 which will be laid before Parliament.