DST43410 - Alternative Charge Calculation

Groups can elect to calculate their DST using the alternative charge calculation. DST43400 provides more information about the election and the policy intention of the alternative charge. This page explains how DST liability is calculated under the alternative charge.

The election applies to a category of digital services activities. A group providing multiple digital services activities could therefore choose to make up to three elections (i.e. one for social media services, another for internet search engines and a third for its online marketplaces).

Steps 1 & 2

The first step is therefore to divide the group’s total UK digital services revenues between each category of digital services activity.

Step 3

The next step involves apportioning the £25m annual allowance between the group’s categories of digital services activities. The apportionment is done by multiplying the £25m allowance by the ratio of each category’s UK digital services revenues over the group’s total UK digital services revenues.

Step 4

Step 4 involves calculating the operating margin of each category of revenues the group has made an election to calculate its liability under the alternative charge. This step does not need to be followed for any other category.

The operating margin is calculated by deducting any relevant operating expenses (E) from the UK digital services revenues of that category (R). The result is then divided by the UK digital services revenues of the category (R).

The margin will be nil if E exceeds R.

Step 5

The total liability of the group for the specified category of revenues (‘taxable amount’) is calculated as 0.8 x the operating margin x the net revenues.

The operating margin is the margin found in Step 4.

The net revenues are found by deducting the category’s share of the allowance (Step 3) from the UK digital services revenue of that category.

For any category of revenues that is not being calculated under the alternative charge calculation, the taxable amount is 2% of the net revenues.

Step 6

The taxable amounts are then added together to come to the ‘group amount’ (i.e. the total DST liability of the members of the group).

Step 7

The relevant person’s liability to digital services tax in respect of the accounting period is the appropriate proportion of the group amount. There is further guidance on this in DST44000.

Interaction with cross border transactions relief

If a group makes a claim relating to cross-border relief, group’s total UK digital services revenues will be reduced by the value of the relief as part of the calculation in Step 1.

The relevant operating expenses resulting from these cross border transactions must also be disregarded from the relevant operating expenses relating in Step 4. This ensures the operating margin is not unduly distorted by the relief

Example A

Business Z provides a social media platform which generates £125m of DST revenues. Under the standard DST calculation, after deducting the £25m allowance its DST liability would be £2m.

The social media platform’s operating costs from providing the service to UK users are £123.75m. Its operating margin is therefore 1% (125-123.75/125).

If the group paid the full rate of DST, it would make a loss from providing the social media platform to UK users.

It therefore elects to calculate its DST under the non-standard rate calculation.

Its DST liability is reduced to £0.8m, which is calculated as £100m (the DST revenues less the allowance) multiplied by the 1% operating margin multiplied by 0.8.

Multiple Digital Service Activities

Where a group has more than one type of Digital Services activity, the annual allowance will be apportioned to each type of Digital Services activity in the proportion of DST revenues attributable to each type of Digital Services activity.

Example B

Business Y has the same fact pattern as Business Z in Example A however it also has a search engine which is in scope of the DST.

The search engine generates £225m in UK digital services revenues but the group does not elect to make it subject to the alternative basis of charge.

Business Y therefore has total UK digital services revenues of £350m: £125mn (from its social media platform) added to £225mn (from its search engine).

It first splits the allowance between the two business activities. So ~£9mn is allocated against the social media platform revenues (£125mn/£350mn*£25mn) and ~£16mn against the search engine revenues.

The net revenues for each activity are therefore ~£116m for social media and ~£209m for search engine.

It then performs the same calculation as before to determine the operating margin of the activity for the election. As before, this is 1%.

It calculates the DST liability for the search engine revenues under the standard calculation of 2%*(£225-16m)= ~£4.2m

It calculates the DST liability for the social media revenues under the alternative basis of charge 1%*0.8*£116m =~£0.9m.

The group has a total DST liability of ~£5.1m

Example C

Group C has revenues that exceed the DST thresholds from operating an Online Marketplace. It has £100m of UK Digital Services revenues and £125m of UK Digital Services operating costs. This means that the UK Digital Services is operating at a loss. If the election is made the rate for the DST will be 0% and there will be no DST liability to pay for this digital service.