UK Government Faces Tough Balancing Act on Digital Services Tax

The Trump administration’s flood-the-zone strategy has shaken the foundations of the global economy. “Liberation Day” tariffs recently imposed—and currently paused—signaled an uncompromising stance on trade, and the so-called special relationship between the US and the UK has offered the UK little protection.

Against this backdrop, and with the UK government eager to avoid the fallout of a trade war while chasing the prize of a lucrative trade deal, speculation that Downing Street might be rethinking the Digital Services Tax to keep Washington onside feels less like rumor and more like realpolitik.

The tax was introduced to address what the UK government viewed as a fundamental misalignment in the international tax system—the disconnect between where profits are taxed and where value is actually created in the digital economy. Policymakers argued that the existing global framework allowed major multinational tech companies to avoid contributing their fair share in markets where their users played a key role in generating value.

The DST was designed to close this perceived gap, ensuring such companies paid taxes that better reflected their economic footprint in each country. Crucially, the tax was positioned as a temporary measure—a bridge to more comprehensive, long-term international tax reform.

Businesses that operate social media platforms, search engines, or online marketplaces for UK users become liable for the DST if their group’s global revenues from those activities exceed £500 million ($655 million), with more than £25 million generated from UK users. Once those thresholds are met, the DST applies a 2% tax on revenues attributable to UK users, with an exemption for the first £25 million.

The tax is reportable and payable annually, and liability is assessed at the group level, although the DST itself is levied on the specific entities within the group that earn the relevant revenues. For DST purposes, the group includes all entities consolidated in the group’s financial accounts, which means that even entities with no UK corporate tax presence may contribute to the DST thresholds.

It isn’t difficult to see how the DST, and the financial burden it imposes on US tech companies, might clash with President Donald Trump’s America-first agenda, making it a potential sticking point in US-UK trade relations.

How the government intends to negotiate this friction is unclear. No details of the proposals under consideration have been released, and the Chancellor’s Spring Statement didn’t mention the DST, a conspicuous omission given the current context.

Reports suggest the UK may be prepared to reduce the headline rate while broadening DST to bring more companies within its ambit. That would deliver a tax break to large, primarily US, tech companies, while ensuring that overall DST revenues don’t drop.

Given that the DST generates over £800 million a year for the UK Treasury, and with public finances under considerable strain, the government is unlikely to relinquish such revenue lightly.

As with all things Trump-related, opinion is sharply divided. In principle, there is nothing wrong with the government adjusting the DST in pursuit of broader, more economically significant gains. In an era of increasingly complex trade dynamics, pragmatism must be key. A prudent government, acting in the national interest, would be wise to keep all options on the table.

In that context, changing the DST might be the price that must be paid to secure the right trade deal for the UK—particularly one that delivers long-term benefits for the UK economy. The government might want to adopt a commercially pragmatic approach that prioritizes economic stability, particularly when the UK economy, while showing signs of growth, faces challenges including persistent inflation and a recent contraction in gross domestic product.

Such a decision would court controversy. For those advocating greater corporate accountability and tax transparency—especially for powerful multinational enterprises—reducing or scrapping the DST altogether risks being seen as a step backwards that raises difficult questions on the influence of geopolitics over tax policy and compliance.

A deal involving the DST could send a worrying signal that UK tax policy can be bought and traded, which perhaps runs counter to HMRC’s campaign in recent years for more taxpayers to pay their “fair share” and for greater corporate transparency in the tax system.

Clearly alive to these sensitivities, the Chancellor has reiterated that the integrity of the tax system depends on multinational enterprises paying tax where they operate. She also made clear that the UK will retain full control over its tax policy—including decisions on the DST.

The Trump administration is prioritizing the interests of US industry and business in both domestic and international policymaking. That approach—combined with Trump’s deal-making style—has disrupted the longstanding norms of international trade and the established rules of diplomacy, forcing other governments to adopt more flexible and at times unconventional strategies in their dealings with the US. The UK is no exception.

While tax policy has traditionally been considered separate from trade negotiations, typically through bilateral tax treaties, tax and trade now appear to be increasingly intertwined, even if they remain uneasy partners at the negotiating table.

The challenge for the government’s DST position lies in identifying what adjustments, if any, would satisfy US demands without alienating UK and non-US foreign businesses or undermining the integrity of the UK tax system.

Successfully treading that tightrope—balancing the UK’s established tax policy principles with the unpredictable nature of Trump-era economic diplomacy—will be no small feat. The UK isn’t alone in facing this dilemma. It’s a challenge faced by many governments around the world.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Adam Craggs is a partner and head of tax, investigations, and financial crime at RPC LLP.

Liam McKay is a senior associate in tax, investigations, and financial crime at RPC LLP.

Write for Us: Author Guidelines