Committee report on Digital Services Tax highlights concerns about possible future avoidance and evasion

The House of Commons Committee of Public Accounts published its report on the UK’s Digital Services Tax on 5 April, which highlights concerns about possible future avoidance or evasion by big tech firms.

The Committee was given the responsibility of carrying out an inquiry into the design, implementation and administration of the UK’s Digital Services Tax, which was introduced by HM Revenue & Customs (HMRC) in April 2020. The Digital Services Tax imposes a 2 per cent tax on the revenue of search engines, social media platforms and online marketplaces that derive value from UK users. Designed as a temporary measure, the government expects to remove the Digital Services Tax when international reforms proposed by the Organisation for Economic Co-operation and Development (OECD) come into force.

The Committee states that the Digital Services Tax operates “relatively crudely” but raised 30 per cent more than expected in its first year of application with a total of £358 million. Despite exceeding expectations, the Committee report points out that 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 also remains unclear whether future revenues from the tax will meet or exceed the projected £3 billion by 2024-25. 

The Committee expresses concern that likely delays to implementing the OECD’s new rules, which require unanimous agreement by 140 tax jurisdictions, could have significant implications for the future of the Digital Services Tax.  As such, the report states that there is a significant risk that the Digital Services Tax may require extension beyond its intended lifespan, which could prompt changes in taxpayer behaviour. An extension to the application of the Digital Services Tax in the event that the OECD’s new rules are delayed beyond 2024 could result in businesses employ resources to avoid compliance. The report states that while there is no evidence of active tax avoidance or evasion by businesses to date, but this could change in the future as businesses look to employ resources to minimise their exposure to the tax.

Sarah Olney MP, Committee 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.”