No Retreat on UK Digital Services Tax – For Now

This blog is based on an article written by Adam Craggs and Liam McKay that was published by Bloomberg INDG in the Daily Tax Report on 11 April 2025.

Copyright 2025 Bloomberg Industry Group, Inc. (800-372-1033) www.bloombergindustry.com. Reproduced with permission.

Introduction

The Trump administration's flood-the-zone strategy has shaken the foundations of the global economy. 'Liberation Day' tariffs recently imposed - and then paused - signalled an uncompromising stance on trade, and the so-called special relationship between the US and the UK seemed to offer the UK little protection.

Against that 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 (DST) to keep Washington onside felt less like rumour and more like realpolitik. But that speculation was short-lived.

DST

DST 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 DST if their group's global revenues from those activities exceed £500 million ($637.3 million), with more than £25 million generated from UK users. Once those thresholds are met, DST applies a 2% tax on revenues attributable to UK users, with an exemption for the first £25 million.

DST is reportable and payable annually, and liability is assessed at the group level, although 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 DST thresholds.

DST and US trade negotiations

It is not difficult to see how DST, and the financial burden it imposes on US tech companies, might be seen as being incompatible with President Trump's America-first agenda, making it a potential sticking point in US-UK trade relations. Commentators were therefore extremely interested in how the UK government would negotiate that tension. Indeed, reports suggested the UK might be prepared to reduce the headline rate while broadening DST, to bring more companies within its ambit. That would have delivered a tax break to large, primarily US, tech companies, while ensuring that overall DST revenues did not decline.

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

In that context, changing DST was considered by some to be a price worth paying in order to secure an attractive trade deal for the UK - particularly one that delivered long-term benefits for the UK economy. Few would criticise a government that adopted a commercially pragmatic approach that prioritised economic stability, particularly when the UK economy, while showing signs of growth, faces some serious challenges, including persistent inflation and a recent contraction in gross domestic product.

However, such a decision would still risk controversy. For those advocating greater corporate accountability and tax transparency, especially for powerful multinational enterprises, reducing or scrapping DST altogether risked being seen as a retrograde step that would raise difficult questions on the influence of geopolitics over tax policy and compliance. In that regard, a deal involving DST could have been seen as an indication that UK tax policy can be bought and traded, which would run counter to HMRC's campaign in recent years for more taxpayers to pay their 'fair share' of tax and for greater corporate transparency in the tax system.

Given that DST generates over £800 million a year for the UK Treasury, and with public finances under considerable strain, it was always unlikely that the government would relinquish such revenue lightly. Indeed, clearly alive to those sensitivities, following the Spring Statement, the Chancellor was at pains to reiterate that the integrity of the tax system depended on multinational enterprises paying tax where they operate. She also made clear that the UK would retain full control over its tax policy, including decisions relating to DST.

On 8 May 2025, the US and UK announced the general terms for a bilateral trade agreement known as the Economic Prosperity Deal (EPD). Under the EPD, tariffs on UK-manufactured cars were immediately reduced to 10%, while tariffs on UK steel and aluminium were removed entirely. The US and the UK also agreed to immediately begin the corresponding negotiations concerning the initial proposals of EPD which, in the future, may be extended to other areas. Notably, the EPD made no mention of DST, suggesting that the UK has resisted pressure to compromise on its tax policy, at least for now.

The future of DST

The Trump administration has made no secret of its intention to prioritise the interests of US industry and business in both domestic and international policymaking. That approach, combined with the administration'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 independently of trade negotiations, tax and trade now appear to be increasingly intertwined, even if they remain uneasy partners at times. The challenge for the UK government lies in identifying which adjustments to its tax policies, if any, would satisfy US demands without alienating UK and non-US foreign businesses, or undermining the integrity of the UK tax system.

Although DST has survived for now, it is clear that Washington still views it as incompatible with its America first policy. Pressure on the UK government to make concessions may well resurface in the not too distant future. Balancing the UK’s established tax policy principles with the volatile dynamics of Trump-era economic diplomacy, will be no easy task. The UK is not alone in facing this dilemma, it is a challenge facing many governments around the globe.