The Digital Services Tax – Report Summary

Summary

The government introduced Digital Services Tax in April 2020 because it was concerned that the existing international tax system did not recognise the value being generated for digital companies through UK online users. As long ago as 2012 this Committee called on HMRC to address the issue that multinationals appear to avoid UK corporation tax by moving money to other tax jurisdictions, so we are pleased to see progress in this area. We were also pleased to see an example of successful implementation of a new tax, and would encourage the government to gather lessons and apply them to future tax developments. The Digital Services Tax raised £358 million in its first year, 30% more than expected. However, we note the 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 Digital Services Tax was only ever designed as an interim tax and operates relatively crudely – especially in relation to high-volume low-margin businesses. HM Treasury acknowledges that the tax is a ‘second best’ solution while it awaits the implementation of a series of reforms to international tax rules to ensure that multinational enterprises pay a fair share of tax wherever they operate. The first stage (‘Pillar One’) of these reforms, developed by the Organisation for Economic Co-operation and Development (OECD), are currently due in 2024. However, we saw little evidence to support the confidence expressed by the departments in evidence to us that the OECD reforms will be implemented to the current timetable. The proposed reforms are complex and rely completely on agreement being reached across around 140 tax jurisdictions. If the OECD reforms are delayed the Digital Services Tax is likely to have a longer life than it has been designed for. We are concerned that this may prompt businesses within the scope of the tax to consider using the huge resources and expertise at their disposal to circumvent the tax. HMRC will need to be ready for that scenario, with robust measures to ensure compliance in the longer-term if needed.