Normally the Chancellor’s budget statement comes and goes and no one is really interested. A slightly higher personal allowance, some tweaks to things like Corporation tax, some inheritance tax changes – These are things we expect and generally take in our stride. Today however, marketplace sellers will want to know if a UK Digital Services Tax is to go ahead and if so what will the impact on their businesses be?
What is the UK Digital Services Tax?
The UK Digital Services Tax has been known about for some time and is essentially intended to be a tax on large international tech firms who trade offshore but profit from UK sales and services. In particular it’s intended to target social media platforms, search engines and online marketplaces. There is an exemption from the online marketplace definition for financial and payment services providers.
Unless the new Chancellor decides to scrap a UK Digital Services Tax at the 11th hour, from the 1st of April 2020, the government will introduce a new 2% tax on the revenues of large tech firms which derive profits from UK users.
The UK Digital Services Tax will apply to businesses that provide a social media platform, search engine or an online marketplace to UK users when the group’s worldwide revenues are more than £500m and more than £25m of these revenues are derived from UK users at a rate of 2%. There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to Digital Services Tax.
Revenues are derived from UK users if the revenue arises by virtue of a UK user using the platform. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed by a UK user. This for instance could include a merchant in the US paying for Amazon Sponsored Products or eBay Promoted Listings to promote offers to UK sellers.
Where one of the either the buyer or seller for a transaction on an online marketplace is a UK user, all the revenues from that transaction will be treated as derived from UK users. However, the revenue charged will be reduced to 50% of the revenues from the transaction when the other user in respect of the transaction is normally located in a country that operates a similar tax to the Digital Services Tax (e.g. France).
What could be the impact for UK merchants selling on marketplaces?
We’ve already seen Amazon instantly hike their fees in France due to the French Digital Tax. With a 3% tax applied in France Amazon simply passed this tax on to merchants by raising their fees leaving small businesses with no option other than to pass the cost on to their customers. From the 1st of April, Amazon are also hiking their referral fees in Italy due to an Italian 3% Digital Tax.
One can only expect that the impact of a UK Digital Services Tax would result in marketplace fees in the UK rising in a similar manner which will impact every marketplace seller including all small businesses.
Does anyone thing a UK Digital Services Tax is a good idea?
eBay are on the record as thinking a UK Digital Services Tax is a terrible idea and Rob Hattrell, VP eBay UK wrote a letter in The Times this week calling for an international corporate taxation solution, rather than national measures in individual countries.
“We recognise that the rules around corporate taxation need urgent reform and tech needs to pay its fair share.
The debate is no longer about whether this should happen. It is about the best way of achieving this.”
– Rob Hattrell, Vice President, eBay UK
Even the UK government still believes the most sustainable long-term solution to the tax challenges is reform of the international corporate tax rules. The UK government supports G7, G20 and OECD discussions on the different proposals for reform and have promised to scrap the UK Digital Services Tax once an appropriate international solution is in place.
For sure, sellers won’t appreciate seeing their marketplace fees increase and, although they probably won’t notice initially notice price increases, it’s also bad for consumers. Any costs that marketplaces incur are generally passed to merchants and they in turn have no option in the end other than to charge their customers more.
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