DST18700 - Financial Services

There is an exemption from the online marketplace definition for online financial marketplaces. This reflects that financial services businesses have certain features that mean the policy rationale behind DST applies less strongly in their case than it does for other marketplaces.

The exemption is intended to be broad and to encompass all types of financial services activity. It applies when more than half of the marketplace’s revenue in the accounting period arises in connection with facilitating the trading of financial instruments, commodities or foreign exchange.

The requirement that most of the revenues must relate to financial services activities ensures the exemption only applies to substantive financial services businesses and prevents other marketplaces availing themselves of the exemption through having a small volume of financial business.

The draft legislation published in July 2019 included an additional condition testing whether the provider of the online marketplace was a regulated entity. This test does not feature in the final legislation.

Effect of the exemption

Where the exemption applies the online service will be exempt from being an online marketplace. This means it will be out of scope from DST unless it meets the definitions of a social media service or is an internet search engine.

It is possible some non-financial marketplaces may receive some revenues from financial or payment services. As these marketplaces will not qualify for the exemption, these revenues will remain taxable where they arise in connection with the marketplace.

Facilitation

The online marketplace does not need to trade the financial instruments, commodities or foreign exchange itself (as a principal) to benefit from the exemption. The revenue test applies to revenues arising from the facilitation of such trading.

Financial services businesses which only trade financial instruments as a principal will not meet the definition of an online marketplace in any event.

It is possible a financial service business both trades and facilitates the trading of financial instruments. The facilitation could be substantial enough for the online service to meet the second marketplace condition. However, the revenues arising in connection with the marketplace will be limited to the revenues from the facilitation activity so the trading revenues will not be included in the revenue test (either the numerator or denominator).

Trading of financial instruments

The reference to trading financial instruments specifically includes the creation of financial instruments. This ensures Peer 2 Peer lenders and some insurance business are covered by the exemption.

Trading of financial instruments does not include the mere acceptance of cash in consideration for the sale of a particular thing. In that case it is the particular thing which is being traded rather than the cash (or any other financial instrument).

Meaning of financial instruments

A financial instrument takes its meaning from the appropriate accounting standards. It will typically encompass any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument of another entity. This means it does not matter whether the online marketplace’s revenues arise in connection with financial assets or financial liabilities.

Contracts of insurance are also specifically included within the definition of a financial instrument by referencing the definition provided by section 64 of FA 2012.

Revenues

The revenue test applies to the total digital services revenues arising in connection with the online marketplace.

Commodities

The exemption will also apply when more than half of the revenues in the accounting period relate to facilitating the trading of commodities or foreign exchange. This ensures that revenues relating to spot trading of commodities and derivatives settled by the delivery of the underlying commodity are included. It also means commodities exchanges, which are similar in nature to stock and securities exchanges, also qualify for the exemption.

The legislation clarifies that trading in commodities refers to the kind of commodity trading on a commodities exchange and does not extend to the sale of any tangible item on a marketplace.

The kind of commodities traded on an exchange would normally be generic, fungible commodities like metals, petrochemicals or grains for example. It would not normally include manufactured items or consumer goods.

Location of the financial services activity

The scope of the exemption is not restricted to UK regulated businesses. A financial services business can qualify for the exemption regardless of where it is based.

Comparison websites

Some financial businesses also operate a ‘comparison website’ allowing users to find the best financial products across the market. The comparison website is likely to meet the online marketplace definition. Its revenues clearly arise from facilitation activities so whether it meets the financial services exclusion will depend on the nature of the products being offered/compared. Retail financial products and insurance products like current accounts or personal loans will usually relate to the creation of financial instruments.

Mixed groups

It’s possible a group could provide both a financial marketplace and a non-financial marketplace.

The application of the legislation will depend on whether these are part of the same online service or are separate online services. Where they are one online service, the revenue test will apply to the total revenues and the online service will be exempt if the financial revenues exceed 50% of the total. In contrast, if they are two online services the revenue test will be applied to each service’s revenues.

The principles outlined in the online service section in DST12400 apply here. Given the nature of financial services regulation and the large difference in the nature of the activities, HMRC would expect there to be two different services provided both activities were substantial.

Example G

Business G has a large life insurance business and a goods marketplace. The life insurance business is regulated in the UK and prudential regulation prohibits the regulated entity from carrying on non-financial activities. The life insurance business and goods marketplace are two different online services and will need to be tested against both the online marketplace definition and where relevant the financial services exemption.