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UK DST Report Finds 30% Higher Collections Than Forecasted — Orbitax Tax News & Alerts

The UK National Audit Office recently published a report on HMRC's implementation of the Digital Services Tax (DST). The DST was introduced in April 2020 and is planned to be retired once Pillar 1 of the OECD's two-pillar solution is introduced in the UK. Some of the key findings of the report are as follows:

HM Revenue & Customs (HMRC) received GBP 358 million in DST receipts for the 2020-21 tax year, which was 30% more than forecast. HMRC's initial forecast, in July 2019, expected DST receipts of GBP 275 million for 2020-21. HMRC and the Office for Budget Responsibility forecast in March 2022 that cumulative revenue from DST will exceed GBP 3 billion by 2024-25. There were two main reasons for the higher-than-expected receipts:

  • The initial forecast assumed that business groups would seek to minimise their DST liability, but it had not observed such behaviour.
  • 14 of the 18 groups that paid DST paid more than expected. One group paid almost five times the amount initially forecast. HMRC had not identified six of the payers in its initial assessment.

Around 90% of DST revenues for 2020-21 were provided by five business groups. In total 18 business groups paid DST. Of the GBP 358 million in DST receipts, GBP 324 million (90%) was paid by five groups. Eleven of the 20 business groups that HMRC initially expected to make a payment determined they did not owe any DST.

DST accounted for 7% of tax paid by in-scope business groups in 2021-22. The 18 business groups that paid DST for the 2020-21 tax year paid around GBP 4.8 billion across all taxes in 2021-22 (excluding employee income tax and national insurance). This included GBP 358 million in DST for the 2020-21 tax year, representing 7% of the UK tax take from those business groups. These groups have paid considerably more tax in total since the beginning of the COVID-19 pandemic as revenues have increased. Their total tax paid increased by 36% between 2019-20 and 2020-21 and by 34% between 2020-21 and 2021-22 (excluding DST). Around two-thirds of tax paid was VAT and around one-fifth was employer contributions to National Insurance. Their taxable profits increased by 16% during the pandemic, while VAT revenues doubled. It is unclear how much of this was due to increased sales or new VAT rules on imported goods.

Most digital business groups who are paying the tax now pay more in DST than they do in Corporation Tax. The introduction of the Digital Services Tax has meant that most groups affected are paying significantly more tax as a result. Of the 18 groups paying DST, 13 paid more DST than Corporation Tax in 2020-21. Of these, nine paid more than twice as much DST as Corporation Tax. A further three groups paid no Corporation Tax. At the other end of the spectrum, three groups paid mostly Corporation Tax, with DST representing less than 10% of their Corporation Tax bill.