Detailed guide: Work out your Digital Services Tax

You’ll need to register within 90 days of the end of your first Digital Services Tax accounting period.

As Digital Services Tax will apply to accounting periods from 1 April 2020, if your group’s accounting period ends soon after this date you may need to take action now to avoid a possible penalty.

This guidance will be updated once Digital Services Tax legislation comes into force.

You’ll need to pay a 2% tax on revenues over £25 million derived from UK users.

If you have a low UK operating margin in the accounting period, you can choose to calculate how much tax you need to pay using the alternative charge.

What you’ll need

To work out the amount you need to pay, you’ll need to know:

  • which of your business activities Digital Services Tax applies to
  • the total UK digital services revenues for the accounting period
  • your UK operating margins on those business activities

Digital Services Tax applies to revenues received in connection with:

  • social media platforms
  • internet search engines
  • online marketplaces

You can find out more about these business activities in the Digital Services Tax manual.

You do not need to pay Digital Services Tax on revenues for an activity if:

Calculating your Digital Services Tax liability

For each activity, if a group is not electing to use the alternative charge to calculate their Digital Services Tax, you can calculate the taxable amount using the steps below.

  1. Find the group’s total UK digital services revenues in the relevant accounting period for that activity.
  2. The group’s net revenues from digital services activity are the revenues in step 1 less the £25 million annual allowance.
  3. The group total Digital Services Tax amount is 2% of the net revenues.
  4. The Digital Services Tax liability for each company in the group is the appropriate proportion of the group total Digital Services Tax amount. The appropriate proportion for each company in the group will be proportional to the amount of digital services revenue generated by that company relative to the rest of the group.

Alternative charge

Groups can elect to calculate their Digital Services Tax using the alternative charge. This will benefit groups who make a loss or have a low UK operating margin on their digital services activities.

The election applies per category of digital services activities. When a group makes a valid election, you can calculate the taxable amount using the steps below.

If there is more than one digital services activity in a category, the steps should be for the total revenues and expenses of the activities in that category. For example, if there are 3 social media platforms, the steps should be for the total revenues and expenses of all 3 social media platforms combined.

  1. Find the group’s total UK digital services revenues in the relevant accounting period for all taxable activities.
  2. Allocate this amount between each category of digital services activity (social media platform, search engine and online marketplace).
  3. Apportion the £25 million annual allowance between the 3 categories of digital services activities. You do this by dividing the revenues found in step 2 by the total revenues in step 1.
  4. The group’s net revenues for each category of digital services activity are the revenues in step 2 less the proportion of the allowance identified in step 3.
  5. Calculate the operating margin for each category of digital services activity subject to the election. To do this, take the revenues for this category of digital activity found in step 2 and deduct any relevant operating expenses incurred in relation to that category. Divide this number by the revenues in step 2 to calculate the operating margin for that category.
  6. The amount of tax for each category of digital services activity the group elects to calculate under the alternative charge method is calculated using the following formula: 0.8 x the operating margin x the net revenues.
  7. The amount of tax for categories of digital services activities not subject to the election is 2% of the net revenues.
  8. Add together the amounts of tax found in steps 6 and 7. The result is ‘the group total Digital Services Tax amount’.
  9. The Digital Services Tax liability for each company in the group is the appropriate proportion of the group total Digital Services Tax amount. The liability for each company in the group will be proportional to the amount of digital services revenue generated by that company relative to the rest of the group.

Operating expenses

Businesses are able to take operating expenses into account when calculating the operating margin. Costs that you can deduct include:

  • cost of sales
  • distribution
  • administration
  • other operating costs
  • amortisation and depreciation

Costs which you cannot deduct include:

  • interest expenses
  • expenditure on acquisitions
  • changes in the valuation of assets
  • tax costs, including the cost of the Digital Services Tax, which arise or occur in the normal course of business

£25 million annual allowance

The £25 million annual allowance is reduced when the accounting period is less than 12 months. To calculate the proportion of the £25 million available, multiply it by the number of months in your accounting period divided by 12.

Cross-border transactions relief

When a transaction involves a UK and non-UK user, and the non-UK user is in a country which also operates a Digital Services Tax, only 50% of the revenues from that transaction will be taxable as UK revenues if a claim is made.

Records you must keep to support your calculation

The responsible member must keep and preserve records to enable it to deliver a correct and complete Digital Services Tax return.

These records may include:

  • transaction records
  • financial management reports
  • accounting reports
  • any other relevant documents or records used, for example evidence used to identify where users are normally located

If HMRC does not accept your calculation

If HMRC do not agree with your calculation, your tax affairs may be checked to make sure you’re paying the right amount.

Get more information

If you have a question that is not covered by this guidance, contact [email protected].

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