The United Kingdom will become one of the first major economies to impose a ‘digital tax’ on tech firms such as Amazon, Facebook, and Google, to ensure they pay their fair share of tax.

The measure, one of a number of tech-related developments, arrived in the chancellor Philip Hammond’s Budget 2018 on Monday , which also apparently heralded the “ending of austerity.

A tech tax is already being considered by the European Commission, which in March this year unveiled its proposals in an effort to get leading (and mostly American) technology companies to pay more tax.

Budget highlights

But the 2018 Budget from chancellor Philip Hammond decided to pre-empt the European move, and was notable for extra funding for various sectors.

This included a £20bn boost to NHS funding announced in June; an extra £1bn for the Universal Credit programme; £160m for counter-terror policing; as well as £1bn for defence – which includes funding for cyber security.

However for the tech industry one of the most notable developments in this year’s budget has been the “digital tax”, and comes after years of complaints that American tech giants pay too little tax in certain European countries.

Hammond said that, as the UK evolves for a digital age, “so too must our tax system to ensure it remains fair and robust”.

British MPs have previously criticised tech companies’ tax arrangements as “immoral”.

Tech companies however have defended their tax structures, and insist they abide by tax laws as they’re currently written.

But Hammond has decided that the status quo has to change.

“There is one standout example of where the rules of the game must evolve now if they are to keep up with the emerging digital economy,” Hammond reportedly said.

Hammond said that tax rules have “simply not kept pace with changing business models”, and he warned that it was “clearly not sustainable or fair that digital platforms businesses can generate substantial value in the UK without paying tax here”.

To this end the United Kingdom will from April 2020 introduce a digital services tax that will include digital platforms such as search engines, social networks and online shops.

And while the chancellor didn’t name Google, Amazon or Facebook directly, he did say he was “already looking forward to my call from the former leader of the Liberal Democrats”.

It should be remembered that Nick Clegg was recently appointed head of global affairs at Facebook.

Two percent

So how much tax will tech firms doing business in the UK be forced to pay?

Well according to Hammond, the UK’s “narrowly targeted tax” on UK-generated revenues and would not be aimed at start-ups.

But rather it will only apply to companies that are profitable and generate at least £500m a year. The first £25m of relevant UK revenues is not taxable.

Hammond said that the tax will be set at 2 percent on the revenues of business carried out with UK-based users.

This 2 percent compares differs to the 2 to 6 percent of turnover tax that had been mooted previously by French economy minister Bruno Le Maire.

The European Commission is said to be seeking a rate of 3 percent.

Hammond believes this digital tax will raise £1.5bn over four years.

The new tax proposal comes after the EU and national governments in Europe have faced criticism for continuing to allow multinational tech firms to make use of legal loopholes to pay low levels of tax by declaring their profits in smaller countries such as Luxembourg or Ireland that have lower tax rates.

However the digital tax was just one of the tech-related announcements in the budget.

Other tech-related announcements included £1.6bn to support the government’s industrial strategy, which will cover areas such as AI, blockchain, self-driving cars and quantum computing.

An extra £200m will be invested to trial new approaches to full-fibre roll outs in rural areas, to start with primary schools.

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Tom Jowitt

Tom Jowitt is a leading British tech freelancer and long standing contributor to Silicon UK. He is also a bit of a Lord of the Rings nut...

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