National Audit Office report on Investigation into the Digital Services Tax

The Digital Services Tax (DST) has raised more revenue than forecast by the Government and increased the amount of UK tax paid by big digital companies. HMRC’s compliance work is ongoing and it has yet to identify any non-compliance among business groups, according to a report by the National Audit Office.

In April 2020 the Government introduced DST on business groups that provide a social media platform, search engine, or an online marketplace to UK users, and have a turnover of more than £500m worldwide, with £25m of these derived from UK users. It was originally expected to raise £300m-£400m a year in tax revenue.

HMRC collected 30% more DST than originally forecast in its first year, with the business groups in its scope - expected to include Google, Amazon, eBay, and Apple, based on their public statements - collectively paying £358m in DST for the 2021 tax year.

The total amount of other taxes paid by big digital companies within scope for the tax (excluding DST) was around £4.5bn in 2021-22, an increase of 34% compared to before the pandemic. Around two thirds of the tax they paid was VAT and around a fifth was employer contributions to National Insurance. Their taxable profits increased by 16% during the pandemic, while VAT revenues doubled. It is unclear how much of this was due to increased sales or new VAT rules on imported goods.

Most digital business groups who are liable for the tax now pay more in DST than they do in Corporation Tax (£351m in total). Of the 18 business groups paying DST, 13 paid more DST than Corporation Tax for 2020-21, including three groups that paid no Corporation Tax. At the other end of the spectrum, three groups paid mostly Corporation Tax, with DST representing less than 10% of their Corporation Tax bill. Around 90% of DST collected was paid by just five business groups.

Our investigation also noted the findings of HMRC’s review of its implementation of DST which cost £6.3m, with a £1.5m underspend on staffing and IT costs. There was a broadly positive response from DST-payers about the implementation of the tax, with the straightforward submission process and the support of HMRC particularly noteworthy.

HMRC’s assessment work for DST payable for the 2020-21 tax year is ongoing. It has not yet identified any tax losses and considers the risk of evasion to be low. In terms of tax avoidance, HMRC observed that business groups had not attempted to reduce or remove their requirement to pay the tax.

While HMRC has yet to identify any non-compliance, it is not yet clear whether it has captured all business groups that should be within scope for the tax. HMRC is continuing work to identify groups that should be within scope. HMRC could still face challenges ahead in enforcing compliance, especially among groups without a physical presence in the UK. It will need to manage a larger number of business groups across a wider range of business activities than initially expected. In addition, HMRC will need to ensure good levels of compliance to maintain DST as a credible alternative until OECD ‘Pillar One’ reforms come into effect.

HMRC has identified more business groups that potentially fall within scope for DST than it had initially expected. In July 2019 it had considered 31 business for being potentially in scope but by September 2022 that number had increased to 101. Any business found to be liable will be retrospectively assessed for the 2020-21 tax year. However, future analysis may be more challenging, as HMRC identifies more business groups that may have different characteristics and attitudes to paying DST.

Our report recommended that HMRC should raise awareness among business groups that are unaware they may be liable for DST, particularly those without a physical presence in the UK, and develop a contingency plan for enforcement against businesses outside the UK that fail to engage with HMRC.

Gareth Davies, the head of the NAO said:

“The Digital Services Tax has succeeded in raising more tax from some big digital companies and has brought in more money than forecast in its first year. However, HMRC could still face challenges enforcing compliance, especially among groups without a physical presence in the UK. It should ensure that big digital companies operating beyond the UK’s borders are aware of the tax and comply with it.”

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Notes for Editors 

1. HMRC received £358m in DST receipts for the 2020-21 tax year, which was 30% more than forecast. HMRC's initial forecast, in July 2019, expected DST receipts of £275m for 2020-21. HMRC and the Office for Budget Responsibility forecast that cumulative revenue from DST will exceed £3bn by 2024-25.

2. HMRC's review of its implementation of DST concluded that it had successfully delivered its key criteria. It recorded underspends against both staff costs (spending £3.5m of a £4.1m budget) and Information Technology costs (£2.8m of a £3.7m budget), which it attributed to setting a conservative budget.

3. HMRC has identified eight categories of behaviour that could lead to non-payment of tax, ranging from tax evasion (deliberate illegal activity) to errors in completing tax returns. HMRC has not yet identified any tax losses in any category (though its compliance work is ongoing).  HMRC considers the risk of evasion as low because the reputational risk to companies would likely outweigh any financial gains.

4. The UK government intends to retire DST once 'Pillar One' of the OECD reforms is introduced in the UK. Pillar One is expected to re-allocate some taxing rights over the largest and most profitable multinational business groups from their home countries to the tax jurisdictions where their customers and users are located.

5. Although the Pillar One reforms will effectively replace DST, HMRC considers that differences mean that there is little in the design, legislation and administration of DST that can be meaningfully applied to its future work. Decisions relating to legislation, implementation and the compliance regime will be agreed between all participating nations.

6. Due to taxpayer confidentiality our report does not name Digital Service taxpayers unless they have publicly announced that they have paid, or expect to pay, the tax. Companies which have publicly stated that they pay the tax are Google, Amazon, eBay, and Apple.