Committees

Success of UK’s Digital Services Tax tempered by concern about future avoidance or evasion by big tech

5 April 2023

  • Temporary “blunt instrument” tax may be in place much longer than envisioned
  • Greater than predicted initial revenues may still not represent full compliance
  • Poor HMRC record on compliance leaves major doubts over obtaining full value for UK

As long ago as 2012 the Public Accounts Committee called on HMRC to address multinationals avoiding UK corporation tax by moving money to other tax jurisdictions. In a welcome move, the Digital Services Tax was finally introduced in 2020 to capture the value added to major digital businesses by UK users interacting with online marketplaces, social media platforms and search engines. It is a tax on turnover, not profits, for business groups whose revenues from in-scope activities are more than £500 million and where more than £25 million is derived from UK users.

Designed as an interim measure while the OECD implements a more complex and complete international tax agreement, the DST operates relatively crudely but still raised £358 million in its first year - 30% more than expected. But there is continuing uncertainty about how much tax should have been paid in its first year due to the tax’s novelty and the effects of the pandemic. It remains unclear whether future revenues will meet or exceed the projected £3 billion by 2024-25. 

The Treasury acknowledges the DST is a ‘second best’ solution while it awaits the OECD reaching complete agreement across around 140 tax jurisdictions.  The PAC is concerned that likely resulting delays to implementation may prompt the large multinational businesses in scope of the tax to consider using the huge resources and expertise at their disposal to circumvent it. HMRC will need to be ready with robust measures to ensure compliance, possibly for the long-term. 

Comments by the inquiry lead

Sarah Olney MP, PAC lead on this inquiry, said:

 

“We were very pleased to see HMRC finally getting to grips with the realities of taxing multinational corporations, after years of PAC recommendations on this. But the Revenue needs to up its game on compliance - especially across jurisdictions - about how the tax will actually operate, over what will likely be years more before a proper international tax is fully operational.”

Further information

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