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Daily Tax Report: International

‘Take Action Now,’ U.K. Tells Tech Companies in Tax Guidance (1)

April 1, 2020, 12:26 PMUpdated: April 1, 2020, 6:13 PM

Complying with the U.K. digital services tax could bring legal and technical headaches in a time of crisis, tax practitioners warn, because Parliament has not yet been able to give its final approval.

The measure—which was supposed to go into force Wednesday—applies a 2% tax to revenue from social media platforms, search engines, and online marketplaces. It is aimed at companies with global digital revenue of at least 500 million pounds ($580 million) and 25 million pounds of U.K. digital sales and will likely hit tech giants like Facebook.com and Amazon.com Inc.

The tax was included in the U.K.'s Finance Bill 2020 and will apply to accounting periods from April 1. Guidance issued Wednesday by Her Majesty’s Revenue and Customs is meant to help companies figure out how much they will need to pay.

It urged tech firms to act now to comply with the yet-to-be-finalized legislation or risk penalties. But this could put companies in the position of complying with a tax that isn’t yet law, because the budget was temporarily shelved when Parliament closed as a precaution against the new coronavirus outbreak.

“It would be a brave in-house lawyer who does not comply with this law,” said David Klass, head of tax at Hunton Andrews Kurth. “But it should be noted that you cannot be penalized for not complying with guidance. What they would be risking is not complying using the draft rules.”

The companies are unlikely to find sympathy with Her Majesty’s Revenue and Customs if they do not comply with the draft rules despite the current coronavirus crisis, he added.

Using just guidance to comply with tax rules is fraught with legal uncertainty, said Stephen Daly, a lecturer in corporate law at King’s College London, part of the University of London.

“If you do rely on the guidance published by HMRC it’s not entirely clear” if it would carry the weight of an actual law, Daly said.

There are examples in case law that suggest if the future legislation says something different from the guidance, then taxpayers are without a remedy because they are required to comply with the law and not the guidance, said Daly.

The government is creating a large degree of uncertainty and confusion for tech companies through its implementation of the digital services tax, Antony Walker, deputy CEO of techUK, the U.K. tech industry body said.

“This is all at a time when the legislation required to enact the tax has not yet passed in the House of Commons and due to Covid-19 resources are stretched,” he added. “It would therefore be wise to seek to look again at how the DST has been designed and how and when it should be implemented.”

The U.K. government did not respond to a request for a comment.

(Updates throughout with additional reporting.)

To contact the reporter on this story: Hamza Ali in London at hali@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Joe Stanley-Smith at jstanleysmith@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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