Tech giants will be taxed 2 percent on revenues they make in the UK, Finance Minister Philip Hammond revealed during Monday afternoon’s Budget announcements, announcing a new Digital Services Tax.

The Budget is the last before the UK’s departure from the EU.

The Digital Services Tax has been designed to make sure it will be established tech giants who are earning $500 million and more in global revenues, and not startups based in the country.

“This will be a narrowly targeted tax on the UK-generated revenues of specific digital platforms,” Hammond said.

“It will be carefully designed to ensure it is established tech giants rather than out tech startups that shoulder the burden of this new tax.

Hammond stressed that the tax is not an online sales tax, which would affect consumers. The Digital Services Tax will come into affect in April 2020 and is expected to raise around £400 million per year.

“We will consult on the detail to make sure we get it right, and to ensure that the UK continues to be the best place in the world to start and scale-up a tech business,” Hammond added.

digital services tax
Social Media sites could face tax if they do not do more to protect sites from extremism content.

The decision came as the Organisation for Economic Cooperation and Development (OECD) is attempting to develop – amid sustained disagreement among members on the shape of any proposal – international tax rules that can cope with digital firms that can shift sales and profits between jurisdictions with ease.

A March proposal from the European Commission meanwhile sought to leapfrog those efforts and establish a European tech tax.

UK “Backing the Technologies of the Future”

£1.6 billion was allocated for new investments to support modern industrial strategy, and another £150 million for fellowships to attract talent, meanwhile. Hammond also announced £1 billion for the Ministry of Defence, including to boost cyber capabilities, and £160 million for counter terrorism.

Public borrowing in 2018 will be £11.6 billion lower than forecast in March meanwhile, representing 1.2 percent of GDP.

Earlier this month the Chancellor, in a speech to the Conservative Party conference had waved the prospect of the Digital Services Tax, saying: “The best way to tax international companies is through international agreements, but the time for talking is coming to an end and the stalling has to stop. If we cannot reach agreement, the UK will go it alone with a ‘Digital Services Tax’ of its own.”

Hammond has also tasked President Obama’s former chief economist, Jason Furman, with leading a review of the UK’s competition regime, “to ensure it is fit for the digital era.”

Hammond also today committed to abolishing private finance initative (PFI) contracts; boosting the annual investment allowance from £200,000 to £1 million for two years and providing £900 million in business rates relief for small businesses and £650 million to rejuvenate High Streets.

TechUK Responds

techUK CEO, Julian David, said in an emailed statement: “Today the Chancellor said that the UK was open for business and prepared to embrace the future. In reality, he has sent mixed signals. Announcements to support the building of new business facilities, support for the acquisition of IP rich businesses and £1.6 billion for Industrial Strategy measures, including Quantum Computing, are very positive.

He added: “However his proposals for a Digital Services Tax cut across the grain of that positive narrative. techUK remains opposed to any tax that seeks to narrowly target businesses simply because they are digital. The kind of tax being proposed will be bad for investment and bad for the UK economy.

“We welcome the Chancellor’s recognition of the benefits of an international approach but the OECD and the EU Expert Group on tax have said that a national digital services tax is the wrong idea. This is an international tax issue that needs an internationally agreed solution. Work at OECD level is progressing. The UK should show commitment to that process and not encourage others to look to unilateral action.

“The proposal to introduce a tax in April 2020 risks cutting across the OECD’s timescale which aims to reach consensus by 2020. It would be bizarre if the UK were to implement a new tax just as real and substantive international action is being reached.”