Budget 2018: Government to introduce two per cent Digital Services Tax aimed at Amazon, Facebook and Google

Targeted tax on all UK-derived revenues of internet giants intended to raise £400m from 2020

Chancellor Philip Hammond has announced plans for a Digital Services Tax aimed at online companies trading in the UK with turnover of more than £500 million per year.

The tax, levied at two per cent of UK-derived revenues, was unveiled during the Budget today and is intended to raise around £400 million from companies operating as search engines, social media platforms, and online marketplaces. The tax will be introduced in 2020.

It is aimed, Hammond said, at "established tech giants" rather than start-ups: principally, Amazon, eBay, Facebook and Google. The tax would only apply to profitable companies, but could be abolished if members of the Organisation for Economic Co-operation and Development (OECD) can agree a formula for taxing internet giants.

The rules have simply not kept pace with changing business models

"The rules have simply not kept pace with changing business models and it's clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business," said Hammond.

He continued: "We will consult on the detail to make sure we get it right, and to ensure that the U.K. continues to be the best place to start and scale-up a tech business."

However, Facebook and Google could plausibly argue that they operate primarily in the online advertising space, rather than social media (Facebook) and search engines (Google). And the move could also provoke a response from the US government, given that it would exclusively target US companies.

"Given the dominance of the US tech giants, it is hard to see the Trump administration taking kindly to the digital sales tax as the UK sets out its stall for the best possible trade deal with the US," Dan Neidle, a tax partner at law firm Clifford Chance told the BBC.

It could also a rethink by US internet giants over their investments in the UK. Google, for example, is currently spending £650 million on a new headquarters in Kings Cross, London, which will have room for 4,500 employees. The average salary at Google in the UK, furthermore, is said to be around £160,000.

The companies targetted by the tax have yet to issue a formal response to the tax initiative, although shares in Amazon, Google and Netflix all traded lower on US stock exchanges following the announcement - investors taking in the suggestion that the companies could be in line to pay higher tax bills in the future.

It comes after a similar initiative was put forward by France's President Macron as a means helping to make good a large shortfall in European Union budgets when the UK formally leaves the EU. At the moment, the proposal for a three per cent levy is being blocked by a number of countries who claim that it would not raise anywhere near enough, and that it could end up costing more to collect than it raises.

However, the initiative did win some plaudits among UK technology companies.

Richard Stables, CEO of price comparison service Kelkoo, described it as "long overdue".

He added: "Google and Amazon have been avoiding tax payments which has given them an unfair edge over the competition [but] online retailers' financial advantage over bricks and mortar competitors is not the reason for the struggle and failure of traditional high street names. That is down to the inability to meet consumer demand for a coherent online strategy and user experience."

TechUK CEO Julian David, meanwhile, accused the Chancellor of sending "mixed signals", with the Digital Services Tax being "bad for investment and bad for the UK economy".

As well as the new tax, Hammond announced £1.6 billion in new investments for the government's modern industrial strategy, and a further £150 million for fellowships to attract new talent.

Industry watchers have welcomed this as a first step, but say that more work needs to be done. Jordan Morrow," head of data literacy at Qlik - publisher of the Data Literacy Index - told Computing:

"To truly reap the benefits of the 'fourth industrial revolution', the government must ensure that it not only attracts the best technical expertise and invests in technological development, but empowers the entire nation to feel more comfortable with data and the technologies that will underpin the future of work and ensure that the UK is a thriving technology innovator.

"With just one in five UK workers confident in their ability to read, understand and communicate with data, British businesses aren't currently in a position to harness the opportunity presented by these new technology investments...

"Investing in new technologies and highly-technical skills aren't enough for the UK to take advantage of the Fourth Industrial Revolution.

"Data will be its universal language, so a firm commitment is needed from the government to support the upskilling of all UK workers in data literacy, so they can harness existing investments by better interpreting, analysing and interrogating data for more robust business outcomes."

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