The UK has published the Finance Act 2020 in the Official Gazette. The Act received royal assent (was enacted) on 22 July 2020 following agreement on the text by both Houses of Parliament. One of the key aspects of the Finance Act 2020 is the Digital Services Tax (DST) provisions.

DST Rate and Scope

The DST applies from 1 April 2020 at a rate of 2% on digital services revenues attributable to UK users, which is determined at the level of a group. The digital services revenues of a group for a period are the total amount of revenues arising to members of the group in that period in connection with any digital services activity of any member of the group. Digital services activity means providing:

• a social media service;
• an internet search engine; or
• an online marketplace.

The services activities are further defined in the Act as follows:

Social media service means an online service that meets the following conditions:

• 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
• making content generated by users available to other users is a significant feature of the service.

Internet search engine does not include a facility on a website that merely enables a person to search:

• the material on that website; or
• the material on that website and on closely related websites.

Online marketplace means an online service that meets the following conditions:

• the main purpose, or one of the main purposes, of the service is to facilitate the sale by users of particular things; and
• the service enables users to sell particular things to other users, or to advertise or otherwise offer particular things for sale to other users.

Further, providing a social media service, internet search engine, or online marketplace also includes carrying on an associated online advertising service. Associated online advertising service means an online service that:

• facilitates online advertising; and
• derives significant benefit from its association with the social media service, internet search engine, or online marketplace.

Where an associated online advertising service derives significant benefit from its association with more than one type of digital services activity, revenues arising from the service are to be treated as attributable to each of the types of digital services activity in question in a just and reasonable manner

Lastly, an exclusion is provided for online financial marketplaces. An online marketplace is an online financial marketplace for a relevant accounting period if more than half of the revenues arising to the provider in the accounting period in connection with the online marketplace arise in connection with the provider’s facilitation of the trading of financial instruments, commodities, or foreign exchange.

Threshold Conditions

A group is subject to DST if meeting prescribed threshold conditions for an accounting period, including:

• the total amount of digital services revenues (worldwide) arising in that period to members of the group exceeds GBP 500 million; and
• the total amount of UK digital services revenues (from UK users) arising in that period to members of the group exceeds GBP 25 million.

If the duration of the accounting period is less than a year, the above amounts are proportionately reduced.

Charge to DST

When the threshold conditions are met for an accounting period, each person who was a member of the group in the accounting period (a relevant person) is liable to DST in respect of UK digital services revenues arising in that period. To find the liability of a relevant person to DST in respect of the accounting period, the following steps are taken:

• Step 1: Take the total amount of UK digital services revenues arising to members of the group in the accounting period.
• Step 2: Deduct GBP 25 million from the amount found under step 1.
• Step 3: Calculate 2% of the amount calculated under step 2. The result is the group amount.
• Step 4: The relevant person’s liability to DST in respect of the accounting period is the appropriate proportion of the group amount.

The appropriate proportion means such proportion of the total amount of UK digital services revenues arising to members of the group in the accounting period as is attributable to the relevant person. If the duration of the accounting period is less than a year, the sum mentioned in step 2 is proportionately reduced.

An alternative basis of charge may also be elected, which involves apportioning the total amount of UK digital services revenues among the three different categories of revenues and calculating an operating margin that takes into account the amount of relevant operating expenses of the group in the accounting period.

DST Payment and Return Obligations

Where DST applies in respect of an accounting period, it is due and payable on the day following the end of 9 months from the end of the accounting period. The DST return for an accounting period must be delivered before the end of one year from the end of the accounting period.

Returns are to be delivered by the responsible member of the group, which is the parent of the group or another group member nominated by the parent. The responsible member is also required to comply with certain notification obligations, including a notification to HMRC when the threshold conditions have been met, which is due within 90 days from the end of the accounting period.

Other Measures of Finance Act 2200

Some of the other main measures of the Finance Act 2020 include the following:

• The rates of income tax for tax year 2020-21 are set as follows (unchanged from previous year):
  • the basic rate is 20%;
  • the higher rate is 40%; and
  • the additional rate is 45%;
• The main rate of corporation tax is set at 19% for financial years 2020 and 2021, instead of the previously scheduled reduction to 17%;
• The Capital Gains Tax (CGT) entrepreneurs’ relief lifetime limit is reduced from GBP 10 million to GBP 1 million for qualifying disposals made on or after 11 March 2020;
• A restriction is introduced on the amount of chargeable (capital) gains that a company can relieve with its carried-forward allowable (capital) losses from previous accounting periods, which includes that a company is only able to offset up to 50% of chargeable gains using carried-forward capital losses with effect from 1 April 2020;
• The research and development (R&D) expenditure credit rate is increased from 12% to 13% from 1 April 2020;
• The structures and buildings allowance rate is increased from 2% to 3%, with the period of relief reduced accordingly from 50 years to 33 1/3 years from 1 April 2020, with certain adjustment provisions for qualifying expenditure incurred on or after 29 October 2018 on non-residential structures and buildings;
• The surcharge on banking companies legislation is amended with effect from 11 March 2020 to introduce a new adjustment to surcharge profits that denies relief against the surcharge for allowable losses transferred to a banking company from a non-banking company in the same group;
• New provisions are introduced for a CT payment plan providing a deferred payment option in up to six installments over five years for corporation tax on profits or gains arising from certain transactions with a member of the same group of companies resident in another European Union or EEA state, which has effect from 11 July 2019 for transactions occurring in accounting periods ending on or after 10 October 2018; and
• Share loss relief for income tax and corporation tax is extended to apply to disposals of shares in companies that have conducted their business wholly or mainly outside of the United Kingdom with effect from 24 January 2019 (requirement to be a UK business is abolished).

In addition, measures are provided in relation to incentives and relief provided for COVID-19, as well as measures for the taxation of various (COVID-19) support payments.