DST12400 - Meaning of an Online Service

A group will only be in scope of DST if it generates revenues from digital services activities. It consequently needs to identify whether it provides any online services which meet the definition of one of the three digital services activities.

This requires the group to identify its online services and then to test these against the digital services activity definitions. The legislation does not define what is meant by an online service, so this takes its ordinary meaning. In practice this is normally straightforward. The commercial models for the digital services activities in scope of the DST usually depend on a large user base and a significant scale. This, combined with the revenue thresholds, means it should usually be clear whether an online service is of the kind which needs to be considered against the relevant definitions.

However, there are some more difficult boundary cases which will require judgment. The following guiding principles should inform these judgements.

Service to Users

DST is charged on the revenues a group generates from providing digital services activities to UK users. It follows that an activity can only be a DST service if it is provided to third party users (or on behalf of a third party) and generates third party revenues which are recognised in the group’s consolidated financial statements.

Services which are only provided to members of the same group do not need to be considered for DST. For example, a social network that is only used in a single organisation to allow its employees to share information and is not sold to or accessed by third parties would not be a service for the purposes of DST.

Online service

The digital services activities in scope of DST are all highly digitalised services. Services which are substantially provided offline are unlikely to meet the definitions, even if that service includes online supportive functions. However, if the online element of the service is a separate service in its own rights it will need to be tested against the definitions.

Substantive services

HMRC’s view is an activity will only be an online service which needs to be tested against the DST activity definitions when it is a substantive service.

Activities which do not have an independent business purpose and are predominantly provided to support or improve a wider business activity are unlikely to qualify as an online service in their own right and do not need to be tested against the DST definitions. Instead these should be considered as part of the assessment of the core online service. This means functions or processes which are carried on as part of the performance of a service, and which in substance comprise a single service, should not be separately tested.

The key focus here is on the purpose for which the activity is provided and whether it operates, or is capable of operating, as a commercially viable service in its own right.

This focus on substantive services reflects the intended scope of DST. The government’s consultation papers made it clear that it is intended to be narrowly targeted and proportionate. Isolating specific components of a service which on their own may meet the DST services activity definitions but do not generate material value for the group would be extending the scope beyond its original aim. Equally, fragmenting a service into a series of individual functions, which when viewed holistically amounts to a single digital services activity, would be ignoring the economic reality of the business.

In practice, it should be straightforward to determine whether a service is a substantive online service. However, there may be some difficult cases. In reaching a judgement on whether a service should be tested against the definitions, the particular facts of the service and circumstances of the business should be considered.

Relevant factors include:

• Whether the service has an identifiable independent purpose and is, or can be, used independently from the group’s other services
• how users perceive the service
• whether there is a distinct identity to the service (e.g. brand, interface)
• whether the service directly or indirectly generates revenue for the group
• the extent to which the service contributes to the wider revenue generation of the group
• whether the service would be viable on a freestanding basis
• whether the service is an important part of the business’ development and strategy e.g. have meaningful costs been incurred on developing and supplying the service
• whether the provider of the service treats it as an individual service for management or accounting purposes.

Considering users’ reasons for using the service including whether they would be likely to view the activity as a distinct service or part of a broader service will often be a particularly useful indicator of whether there are separate services.

Single or multiple services

Some groups provide several different services to users on a single online platform or website. This raises the question whether the group is providing a single online service or multiple different online services. That is, does the group provide a single comprehensive service, or multiple divisible services on the same platform. The answer will depend on the particular facts and circumstances, but the following factors should be considered:

• The nature of the services provided to users
• The nature of the activities involved in providing the services
• Whether the group provides an undifferentiated service to users of the online service or provides different services to different groups of users
• Degree of interconnection/integration between the different services (e.g. can users buy each service independently or are services offered as a package)
• How users perceive the service
• The degree of overlap in the user base of the different services
• Whether there is a distinct identity to the service (e.g. branding, interface)

In general, services are more likely to be considered as separate online services when the nature of the services offered are very different, they are provided to an identifiably different group of users and the use of one service is not conditional on the use of the other.

Websites

It should not be assumed a website will provide a single service. In some situations, a website or app may comprise a single service but in other cases there may be multiple services provided on a single website. It will depend on the facts and circumstances of the business. The factors set out above should be considered.

Relationship between online services and the revenues connected to digital service activities

The identification of online services is only relevant in determining whether a group provides digital services activities in scope of DST. It has no effect on determining the revenues in relation to those digital services activities. Once a group has identified that it carries on digital services activities, the next stage is to establish the revenues which are receiving in connection with those services. It is this stage which determines the revenues in scope of DST and in effect the boundary and breadth of the services in scope.