The UK’s Digital Services Tax: Where Are We Now?

In Short

Current Status: The UK Government is moving ahead with its implementation of the Digital Services Tax ("DST") despite concerns raised by the United States and the Organisation of Economic Co-operation and Development ("OECD") earlier in the year.  

The Proposal: The UK's DST is charged at 2% on gross UK-generated revenues of large businesses providing a social media service, search engine, or online marketplace to UK-based users. The tax will apply to revenues generated from 1 April 2020. 

Looking Ahead: Businesses should consider the changes in the updated draft legislation and guidance and assess whether their activities and revenues will be within the scope of the new tax. Businesses could be liable to the DST as early as 2021.

The 2020 Budget confirmed that the DST will come into force on royal assent of the Finance Bill 2019/2020 and will apply to revenues generated from 1 April 2020. On 19 March 2020, the UK issued updated draft legislation and guidance in respect of the tax. 

There have been no substantial changes to the initial legislation (issued in July 2019), but the draft HMRC guidance has been expanded, providing detailed examples to assist businesses in identifying in-scope activities, UK users, and attributable UK revenues. However, businesses may still need to make difficult judgements based on the facts and circumstances of their activities to determine whether they will be affected by the tax. 

The following Commentary outlines the key elements of the UK's DST and takes account of HMRC published guidance.


The DST is a 2% tax on the gross UK-generated revenues of large businesses providing social media platforms, search engines, and online marketplaces to UK users. A business is 'large' if (i) its worldwide revenues from digital services are more than £500 million; and (ii) more than £25 million of these revenues are derived from UK users. Revenues are determined based on businesses' consolidated financial statements (prepared under UK or U.S. GAAP, or IAS).

The tax is payable within nine months from the end of an accounting period and the return must be submitted within 12 months. Once the revenue thresholds have been met, a DST return will need to be submitted each year (even where the DST liability is nil) by a nominated responsible member, unless a direction has been given that a return is not required. We are expecting further guidance on the administrative framework of the tax in the coming weeks.

Businesses will be subject to the DST in addition to their existing UK tax liabilities on profits arising from the same digital activities. DST will be deductible against UK corporation tax as a normal business expense but is not creditable. This could result in double taxation for businesses that already have a UK taxable presence. 

The government confirmed the tax is an interim measure that will be repealed once a global solution to the taxation of the digital economy has been agreed to at the OECD level. Current legislative drafting requires the government to review the DST by 2025. This is in line with the OECD's preferred approach, which is to agree a multilateral solution to the tax issues raised by the digitalization of economies worldwide. According to statements made by the OECD in the early part of the year, the OECD expects (perhaps hopes) that a consensus can be found during the course of 2020.

Allowances and Exemptions

The first £25m of UK digital services revenues are exempt from the tax. In addition:

  • Low margin or loss-making businesses can elect to apply the alternative basis of charge. Under the alternative calculation, the DST rate is applied to the operating margin on each digital service activity. If the operating margin is nil or negative for a given activity, the DST liability will be nil for that activity;
  • UK digital services revenues arising from online marketplace transactions can be reduced by 50% (for the purposes of calculating the DST due) if those revenues are subject to a similar DST in another jurisdiction. The UK DST (and the equivalent taxes introduced by some of the OECD members) does give rise to some concerns that businesses could be taxed twice on the same revenues overseas. It is hoped that an OECD level agreement will address these issues in full.   

Financial service providers that operate online financial marketplaces are exempt from the DST. This exemption has been expanded in the updated legislation and is intended to cover a broad range of financial services activities.

Online Services

Businesses will be liable to DST on their in-scope revenues. In-scope revenues are those generated from online services that meet the definitions of one of the following digital services activities: 

Social media service: Defined as an online service where (i) the main purpose, or one of the main purposes, of the service is to promote interaction between users (including interaction between users and user-generated content); and (ii) a significant feature of the service is that user-generated content is made available to others.

Internet search engine: a service allowing users to search for webpages or information across the internet.

Online marketplace: where the marketplace's main purpose (or one of the main purposes), is to facilitate the sale by users of particular "things", and where it enables users to sell (or hire) things on the platform to other users, or to advertise or otherwise offer to other users particular things for sale (or hire). "Things" is defined broadly as "goods, services, or other property".

The above definitions are potentially wide-reaching and could include activities of businesses that do not consider themselves pure online service providers. As such, businesses that interact with customers digitally, in any capacity, should consider whether they are providing in-scope activities. However, the guidance states that businesses need only test those online services against the digital services activities definitions if they are substantive in the context of their overall business. Online services that do not have an independent business purpose and are predominantly provided to support a wider business activity are not in-scope. 

Determining what services should be tested is a matter of judgement based on the particular facts and circumstances of the group. The principles to be considered are: (i) the purpose for providing activities; (ii) how they contribute to the group's overall business, and (iii) whether the service constitutes a single or multiple services.

Businesses will also need to consider if their online service facilitates online advertising as this will also be an in-scope activity to the extent the advertising derives a significant advantage from its association with the group's online service. 

UK User 

Once businesses have identified revenues generated in connection with the digital service activities, businesses then need to determine how much of those revenues are attributable to UK users. 

A "UK user" is defined as a user who it is reasonable to assume is either an individual normally located in the UK or a business established in the UK. The guidance states that businesses should take a pragmatic approach to determining whether or not they have a UK user, and indicates that businesses are not expected to collect information about their users beyond that collected in the course of their commercial activities. 

UK Digital Services Revenues

Revenues are derived from UK users if the revenue arises by virtue of a UK user using the online service. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed by a UK user. The guidance provides five "cases" in which revenues may be attributable to UK users. In the case of B2B transactions, businesses are not expected to "look through" to the location of another user further down the transaction chain.

Special rules apply to revenues generated from online marketplaces as businesses may receive revenues from more than one user for a given transaction. Further, online marketplace revenues that arise in connection with the sale of an interest in UK land or property or provision of UK accommodation will be deemed to be UK revenues regardless of whether a UK user is party to the transaction or the land is owned by a UK person.

Three Key Takeaways

  1. From 1 April 2020, UK-generated revenues of large businesses providing social media platforms, search engines, and online marketplaces to UK users will be subject to a 2% tax in the UK.
  2. Businesses should assess whether their activities and revenues fall within the scope of the tax. A liability to DST could arise as early as 2021.
  3. The tax is an interim measure that is intended to be repealed once a global solution has been agreed upon.
Insights by Jones Day should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request permission to reprint or reuse any of our Insights, please use our “Contact Us” form, which can be found on our website at This Insight is not intended to create, and neither publication nor receipt of it constitutes, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.