The digital services tax has reaped almost £360m from US tech giants including Amazon, Google and Apple in its first year, raising more from most digital businesses than they paid in UK corporation tax.
A report by the National Audit Office (NAO) found that the UK’s digital services tax, which was introduced in April 2020 and levies a 2% charge on gross revenue made by digital titans using search engines, social media services and online markets, which rebounded to 30% more than the government had predicted in 2021.
The government, which believes the tax could bring in a cumulative total of more than £3bn by 2024-25, has exceeded its first annual 2020-21 target of £275m due to a huge boom in online sales during the pandemic .
“Digital services tax has succeeded in raising more tax than some big digital companies and brought in more money than predicted in its first year,” said Gareth Davies, head of the NAO. He said UK authorities had not identified any companies not complying with the new tax, but that “HMRC could face challenges in enforcing compliance, especially among groups without a physical presence in the UK”.
The tax is levied on gross revenue from digital advertising sales and e-commerce sales companies such as Amazon, Apple and eBay make from third-party sellers on their websites, but do not capture direct-to-consumer online sales from retailers such as John Lewis and Tesco.
It is aimed at the largest companies, those with global digital revenue of more than £500m and with revenue from UK users of more than £25m.
Tech giants such as Amazon, Google and Meta-owned Facebook have historically paid relatively little UK corporation tax because they typically ensure that their UK operations make very little profit, rather than funneling their profits through low-tax jurisdictions such as Luxembourg and Ireland.
The NAO said that in total the 18 businesses that paid DST, which was first announced in the 2018 Budget, had a higher bill than the £351m they collectively paid in UK corporation tax.
“Around 90% of the summer time collected in 2021-22 comes from just five large business groups,” said Meg Hillier, chair of the public accounts committee. “HMRC needs to check that all businesses – not just the low-hanging fruit – are paying their fair share.”
The government has not named any business responsible for DST, however businesses such as Amazon, Google, Apple and eBay have publicly acknowledged responsibility for DST.
The report also found that HMRC has identified many more businesses that could be hit with the tax, with a total of 101 being assessed.
Businesses found liable will have to pay the tax retroactively.
“However, future analysis may be more difficult as HMRC identifies more business groups that may have different characteristics and attitudes to paying DST,” the report said.
Amazon, Google and Apple say they have passed the 2% tax on the accounts of third-party businesses and sellers who use their sites.
DST will only be in place for a few years after the UK government agreed last year to phase it out, averting the threat of retaliation on British goods from the US.
From 2024, it will be replaced by a new global tax system after the OECD brokered a deal between 136 countries, including the UK, that will see large multinationals pay tax in the countries where they operate and be bound to the minimum. Corporate tax rate of 15%.