UK.gov fishes for likes as it prepares to go solo on digital sales tax
Critics warn it's complex and off-putting for international firms
Critics have complained that the UK government's proposed digital services tax is complex, confusing and off-putting for international business.
Announced by chancellor Philip Hammond in the budget, the tax aims to address what UK lawmakers see as holes in the international tax framework, which they say fails to recognise the value that UK users generate for digital firms.
The charge will be a 2 per cent levy on the UK revenues of parts of digital businesses that derive "significant value" from UK users.
The government is insistent that it only wants to tax large multinationals and has set out terms to try and ensure that small businesses aren't in scope.
It will apply to firms that generate more than £500m in global annual revenues from in-scope business activities, and more than £25m in annual revenues from qualifying activities linked to the participation of UK users. There will be no tax on the first £25m of UK taxable revenues.
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Spreadsheet Phil hopes that it will bring in £5m in 2019-20, rising to £275m the next year and to £440m by 2023-24. The government said there would be both one-off and ongoing costs for administering the tax, but didn't provide a figure.
The measures didn't receive a particularly warm welcome when they landed earlier this month, with complaints that – in light of Brexit – the UK shouldn't be making it more unappealing for digital firms to set up shop. Critics also questioned why the UK wasn't focusing on pushing for an international agreement, and whether the measures were simply too complicated and confusing.
The government has now issued a consultation – open until 28 February – on the proposed changes, asking for opinions on a range of areas.
Your value is driven by cat pictures, not technology
The main focus is on companies that benefit from user participation. The government defines four areas in which people create value for business: generate content, deepen engagement, increase the network and boost brand value.
For example, social media firms operate platforms made up of user-generated content – tech and branding are an "important driver", said UK.gov, but the core is users' baby photos and passive-aggressive posts.
Similarly, companies rely on users to spread the word to their friends, bringing in more users, which means not just more content but also more data to slurp up and potentially sell on, in whatever form.
The government makes a stab at defining each of the three groups – social media platforms, online marketplaces and search engines – it is seeking to tax. They will all deliver activities by a website or another internet-based application, and generate revenues by monetising users' engagement with the platform.
To be classed social media, users must be able to interact with each other, publish or share personal details or media, and join and create communities. As well as the obvious targets of social networks, this will also cover dating platforms, review sites that aggregate information from users, and blogging and discussion platforms.
Search engines are perhaps more simple: they must offer the ability to view webpages beyond their own and allow people to search and obtain info. It won't include sites that allow narrow searches, such as an online store catalogue.
Online marketplaces allow users to advertise, list or sell goods and link them up with potential buyers – but won't cover a website where someone is selling their own goods.
What this means is that groups will have to isolate the relevant business activities to pay tax on them – something that will be much harder for firms that have more than one major revenue-generating activities.
Simply split up your revenue channels and user locations
The tax will kick in when a UK-based user interacts with one of the in-scope business activities detailed above – a simplistic example is companies generating revenue from ads targeted at UK users.
But it's likely to be a bit more complicated for companies to define all the in-scope revenues channels, and whether those revenues were generated by UK users in some way.
Revenue channels that would need to be counted would include online advertising, subscription fees, delivery fees, ad revenues or sales of data.
The government acknowledged that some revenues might be difficult to attribute – for instance, advertising across a common platform that covers in and out-of-scope activities – but said they should just apportion them "on a reasonable basis" (we can't imagine which way firms would tip those scales).
The government added that it was considering the extent to which mechanical rules would help with this – but conceded that this applies less well to certain business models, and asked for feedback on this.
As for whether it is revenue generated from UK users, the government said firms would have to assess whether payment – like subscription or commission – came from a UK user or "relates to a transaction that involves a UK user".
The lawmakers seem to think this will be pretty straightforward, suggesting it be based on whether the user is a UK resident, or using their IP address, payment details or delivery address. Again, when something doesn't match up, firms will need to "make a just and reasonable apportionment".
Of course, while the government tries to make all of this divvying up of revenue channels and users bases simple, the reality is likely to be much more complicated.
Industry mouthpiece TechUK – which is dead against the idea of the tax – has previously argued this is could end up being a complex determination for some companies.
"Working out what percentage of revenue comes from marketplace services compared to the sale of own-brand products could be very complicated – so the cost of actually collecting this tax could be quite significant for businesses," it said in a missive launched the day after the budget.
The group also pointed out that some businesses would have to make these potentially time-consuming assessments just to see if they were caught in the net.
That's not effin' teamwork
The UK's decision to go it alone comes as the Organisation for Economic Co-operation and Development tries to drum up an international measure – something tech firms would prefer, as it would be easier to implement than multiple single regimes or (if you're being less generous) because it's further away from becoming reality.
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The slow progress to this led to the European Union trying to establish an interim measure – but talks have stalled as many governments dislike the idea of taxing revenues and say it could hamper innovation and investment.
The UK government plans to implement its tax in April 2020 if there isn't an international deal, and that it will no longer apply if an "appropriate" global solution is agreed on. Either way, there will be a review in 2025.
However, critics say that the UK and others – about a dozen EU countries are in the same boat – going it alone will hinder these international talks and cause delays.
It also means the UK is spending money and time drawing up, consulting on and possibly administering one tax regime just to replace it with another shortly after implementation.
Other governments and trade bodies are also worried about repercussions from the US, since it is already being perceived as a tax on all-American success stories in the digital economy. ®