Credit: PA

The government plans to raise more than £400m a year by levying a 2% “digital services tax" on the revenue major internet companies gain through their UK users.

The measure was announced by chancellor of the exchequer Philip Hammond during Monday afternoon’s Budget. The chancellor told MPs that tax “rules have not kept pace with changing models”, and that the current set-up allows online firms that generate significant revenue in the UK to pay minimal tax in this country. 

Hammond (pictured above) said that “a global agreement is the best long-term solution” to this challenge. But, because “progress is slow” in reaching such an accord, the UK will independently launch its own national “digital services tax” in April 2020.

The chancellor said that it will apply to profitable firms that generate global annual sales of at least £500m via “certain digital platform models” including online marketplaces, search engines, and social-media platforms. 

The tax will be “narrowly targeted at UK revenues” gained through those models, he added. Companies will have to pay an annual sum equivalent to 2% of these sales – over a designated tax-free threshold of £25m in annual revenue. The chancellor added that the new tariff will not be an online sales tax levied on consumers.

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Hammond claimed that the amount of UK tax currently paid by large providers of online platforms and services “is not sustainable or fair”. He added that the digital services tax will ultimately raise an estimated £400m each year, but pledged that it will not disadvantage UK tech start-ups

“It is only right that these global giants with significant operations in the UK pay their fair share,” Hammond said. 

Budget documents published this afternoon show that, after raising an initial £5m in 2019/20, in the 20201/21 year the tax is expected to generate revenues of £275m. This is then forecast to rise to £370m in 2021/22, then £400m and £440m, respectively, in the two subsequent years.

Hmmm. The #RedBook small print says the digital services tax will bring in the grand total of £5 million next year! Too little. Too late. #Budget2018 https://t.co/puonFW39jh

— Liam Byrne (@LiamByrneMP) October 29, 2018

Lawrence Jones, chief executive of Manchester-based hosting company UKFast, welcomed the introduction of the digital services tax.

“It’s way beyond time for action on the pitiful amount of tax paid by the likes of Facebook, Amazon and Google, so I congratulate the chancellor on taking this first step,” he said. “If all UK businesses took advantage of the tax rules that apply to off-shore businesses, the country would collapse. It’s the tax-paying entrepreneur that props up this country and it’s time for these tech giants to pay their share.”

But Liam Byrne, shadow minister for digital, said that the digital services tax is “too little, too late”. When set against the multibillion-pound annual revenues of the “big five” tech companies – Apple, Google, Microsoft, Amazon, and Facebook – Byrne claimed that the new levy will raise a paltry amount.