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REPORT

Investigation into theDigital Services Tax
HM Revenue & Customs

SESSION 2022-23
23 NOVEMBER 2022
HC 905

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Investigation into theDigital Services Tax
HM Revenue & Customs

Report by the Comptroller and Auditor General
Ordered by the House of Commons
to be printed on 21 November 2022
This report has been prepared under Section 6 of the
National Audit Act 1983 for presentation to the Houseof Commons in accordance with Section 9 of the Act

Gareth Davies
Comptroller and Auditor General
National Audit Office
17 November 2022

HC 905 | £10.00

Investigations
We conduct investigations to establish the underlying
facts in circumstances where concerns have beenraised with us, or in response to intelligence that
we have gathered through our wider work.

We undertook this investigation to report on how HMRC
implemented, and is administering, the Digital Services Tax
following its introduction in April 2020.

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Contents

What this investigation is about 4
Summary 6

This report can be found on the
National Audit Office website atwww.nao.org.uk
If you need a version of thisreport in an alternative format
for accessibility reasons, or
any of the figures in a different
format, contact the NAO at
enquiries@nao.org.uk

Part OneThe Digital Services Tax 11
Part Two
Revenue raised from theDigital Services Tax 20
Part Three
Managing risks to, and learning
lessons from, the Digital
Services Tax 29

The National Audit Office study
team consisted of:Jeremy Gostick, William Johnson,
David Williams, under the
direction of Andy Morrison.

Appendix One
Our investigative approach 38
Appendix Two
Activities in scope for
Digital Services Tax (DST) 42
For further information about the
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If you are reading this document with a screen reader you may wish to use the bookmarks option to navigate through the parts. If
you require any of the graphics in another format, we can provide this on request. Please email us at www.nao.org.uk/contact-us@NAOorguk4 What this investigation is about Investigation into the Digital Services Tax

What this investigation is about

1
This investigation examines HM Revenue & Customs’ (HMRC’s) implementationof the Digital Services Tax (DST). The government introduced DST in April 2020
because it was concerned that the existing international tax system did notrecognise the value being generated for digital companies through UK online
users. DST is designed to tax business groups that derive large revenues fromUK users of search engines, social media platforms and online marketplaces.
It taxes the revenues (rather than profits) derived from these activities at a rate of
2%. The DST is levied on business groups (groups of companies with the same
controlling interest) rather than each individual company. Groups are liable to pay
DST if their worldwide revenues from in-scope activities are more than £500 million
and more than £25 million are derived from UK users. A group’s first £25 million of
UK revenues are exempt from DST.
2
Historically taxes on corporations have been levied based on the location of the
profit-making activity of a company, but the internet enables companies to generate
revenues without being physically located in the UK. The UK is among many othercountries seeking a multilateral solution to concerns about how the internationaltax system operates for multinational companies. The Organisation for Economic
Co‑operation and Development (OECD) and G20 are leading work with around
140 countries and tax jurisdictions under an ‘Inclusive Framework on Base Erosion
and Profit Shifting’ project to reform international tax rules.
3
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 fromtheir home countries to the tax jurisdictions where their customers and users arelocated. In July 2022 the OECD announced that the multilateral convention which
will implement Pillar One globally will be open for jurisdictions to sign in mid-2023,
with the aim of the Pillar One reforms coming into force in 2024. Separately,‘Pillar Two’ will introduce a global minimum corporate tax rate.

Investigation into the Digital Services Tax What this investigation is about 5

4This investigation reports on how DST is operating following the first year of its
implementation. This report sets out:•

what are DST and the OECD reforms and why they are happening;•

the impact of DST in its first year; and•how HMRC has managed the risks of non-compliance with the tax bycompanies within its scope, and what lessons it has learned.

5
The report does not provide details about the tax paid by individual businessgroups, since this would violate taxpayer confidentiality. The report does not seek
to examine and report on the value for money of HMRC’s administration of DST
at this early stage in its operation, but it does make recommendations to support
its implementation.

6 Summary Investigation into the Digital Services Tax

Summary

Key findings
Revenues generated by Digital Services Tax (DST)6
HM Revenue & Customs (HMRC) received £358 million in DST receipts forthe 2020-21 tax year, which was 30% more than forecast. HMRC’s initial forecast,in July 2019, expected DST receipts of £275 million for 2020-21. HMRC and the
Office for Budget Responsibility forecast in March 2022 that cumulative revenue
from DST will exceed £3 billion by 2024-25. HMRC told us there were two main
reasons for the higher-than-expected receipts:•

The initial forecast assumed that business groups would seek to minimise
their DST liability, but it had not observed such behaviour.

•

Fourteen of the 18 groups that paid DST paid more than expected. One grouppaid almost five times the amount initially forecast. HMRC had not identified
six of the payers in its initial assessment (paragraphs 2.2 to 2.4 and 2.11,
and Figure 6).

7
Around 90% of DST revenues for 2020-21 were provided by five businessgroups. In total 18 business groups paid DST. Of the £358 million in DST receipts,£324 million (90%) was paid by five groups. Eleven of the 20 business groups that
HMRC initially expected to make a payment determined they did not owe any DST(paragraphs 2.2 to 2.4 and Figure 5 and Figure 6).
8
DST accounted for 7% of tax paid by in-scope business groups in 2021‑22.
The 18 business groups that paid DST for the 2020-21 tax year paid around£4.8 billion across all taxes in 2021-22 (excluding employee income tax andnational insurance). This included £358 million in DST for the 2020-21 tax year,
representing 7% of the UK tax take from those business groups (see Figure 1).
These groups have paid considerably more tax in total since the beginning of the
COVID-19 pandemic as revenues have increased. Their total tax paid increased by
36% between 2019-20 and 2020‑21 and by 34% between 2020-21 and 2021‑22(excluding DST). Around two-thirds of tax paid was VAT and around one-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(paragraphs 2.8 and 2.9 and Figure 8).

Investigation into the Digital Services Tax Summary 7

Figure 1
Tax paid broken down by tax type for the 18 business groups that paid
Digital Services Tax (DST) in 2021-22
The DST was roughly equal to the amount of Corporation Tax paid by business groups liable for DST
Tax paid (£m)
3,500
3,000

3,195

2,500
2,000
1,500

1,000
865

500
0

VAT

Employer National
Insurance Contributions

358

351

42

DST

Corporation
Tax

Other
taxes

Type of tax
Notes
1
VAT includes both VAT and Import VAT.
2Other taxes are Import Duty and Stamp Duty Land Tax.

3

This Figure does not include Employee National Insurance Contributions and Employee Income Tax.
These taxes were collectively worth £2,466 million in 2021-22.

4

Business groups paid DST incurred in 2020-21 during 2021-22.

Source: National Audit Office analysis of HM Revenue & Customs data

9
Most digital business groups who are paying the tax now pay more in DST
than they do in Corporation Tax. The introduction of the Digital Services Tax has
meant that most groups affected are paying significantly more tax as a result. Of the
18 groups paying DST, 13 paid more DST than Corporation Tax in 2020-21. Of these,nine paid more than twice as much DST as Corporation Tax. A further three groups
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(paragraph 2.10 and Figure 9).

8 Summary Investigation into the Digital Services Tax

The implementation of DST
10 HMRC implemented DST for £6.3 million, around £1.5 million under budget.
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 £3.5 million of a £4.1 million budget) and Information Technology(IT) costs (£2.8 million of a £3.7 million budget), which it attributed to setting
a conservative budget (paragraphs 3.2 and 3.3).
11
Digital services taxpayers and their representatives were broadly positive about
HMRC’s implementation of Digital Services Tax. They appreciated being able to return
a single submission for the whole business group (rather than separate submissions
for each company) and only needing to submit a return annually. Most noted that
HMRC tended to be helpful when contacted, provided clear guidance and took a
flexible and proportionate approach regarding how groups calculated their DST
liability in order to reduce the administrative burden (paragraph 3.6).

Managing the risk that business groups do not meet their DST obligations
12 HMRC’s compliance work for DST in the 2020-21 tax year is ongoing and it has
not yet identified any tax losses. 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 (although 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. HMRC also told us it had not observed businessgroups attempting to avoid the tax by reducing or removing their requirement
to pay DST within the law, as originally expected. HMRC worked with groups tounderstand how they calculated their DST liability. HMRC told us it has not audited
the data underlying DST returns for any group so far, but that it has the resource todo so if needed. Its current focus is on supporting groups to calculate their liability
accurately (paragraphs 3.9 and 3.10).
13 HMRC has identified more groups potentially in scope for DST than it
initially expected. In July 2019, HMRC initially identified 31 business groups as
being potentially in scope for DST. In September 2022 it had reviewed, or wasassessing, 101 groups, and had undertaken, or was undertaking, a more detailed
risk assessment of 30 of these groups following their submission of a return.
HMRC told us that any group identified as being potentially liable for DST in the2021-22 tax year will also be retrospectively assessed for the 2020-21 tax year(paragraphs 3.8 and 3.11 and Figure 13).

Investigation into the Digital Services Tax Summary 9

14 Future compliance work may be more challenging, as HMRC identifies
more business groups potentially liable for DST. New groups may have different
characteristics and attitudes to paying DST. The challenges HMRC may face include:•

managing groups that misunderstand, or seek to misrepresent, whether theirrevenues are in scope for DST. Relatively subtle distinctions in the businessmodel used by a group can move revenues in or out of scope for DST;•

communicating with groups that do not have a physical presence in the UK,
but may be liable to pay DST; and•taking enforcement action against groups that do not have a physicalpresence in the UK and refuse to pay DST they owe. HMRC has not yet
faced this situation, so the enforcement options available to it are untested(paragraphs 3.11 to 3.17 and Figure 14).

Preparing for the OECD reforms
15 Uncertainty over the details of the Organisation for Economic Co-operation andDevelopment (OECD) ‘Pillar One’ reforms means that HMRC has not yet estimatedthe impact on total tax receipts. DST is intended to be a temporary tax, until it isreplaced by the OECD’s Pillar One reforms to international corporate tax rules.
HMRC told us it is not yet able to estimate how much tax revenue it might collect,as key elements of the Pillar One rules have yet to be finalised. These reforms willaffect future tax receipts in three ways:•

DST will no longer apply, so revenues from it will cease.

•

Corporation Tax payments from some groups will change under Pillar One rules.

•

Some groups will be able to reduce their Corporation Tax payments by theamount that their DST payments exceeded what they would have paid under
Pillar One during the ‘transition’ years of 2022 and 2023.

Although the Pillar One reforms will effectively replace DST, HMRC considers thatdifferences mean that there is little in the design, legislation and administrationof DST that can be meaningfully applied to its future work. Decisions relating tolegislation, implementation and the compliance regime will need to be agreed
between all participating nations (paragraphs 1.12 to 1.14 and 3.19 to 3.21).

10 Summary Investigation into the Digital Services Tax

Concluding remarks
16 Big digital companies are paying more UK tax, and the Digital Services
Tax (DST) is part of this. HMRC collected 30% more revenue through DST thanoriginally forecast for its first year, around 90% of which was paid by five businessgroups. DST accounted for 7% of the total amount of tax paid by business groups
within scope for the tax. Other taxes paid by these business groups grew by 34%
between 2020-21 and 2021-22, due to increased sales during the COVID-19
pandemic and new VAT rules on imported goods.
17 HMRC has yet to identify any non-compliance and it is not yet clear if HMRC
has captured all groups that should be within scope for the tax. HMRC could
still face challenges ahead with enforcing compliance, especially among groups
without a physical presence in the UK. It will need to manage a larger population ofbusiness groups across a wider range of business activities than it initially expected.
HMRC will need to ensure good levels of compliance to maintain DST as a credible
alternative until the OECD Pillar One reforms come into effect.

Recommendations
18 To help it prepare for the potentially larger population of business groups liable
for the Digital Services Tax, HMRC should:aset out criteria to ensure its teams are able to consistently identify all businessgroups, companies and sources of revenue that are in scope for the Digital
Services Tax. This could include updating guidance to DST Compliance teams
to specify when, or in what circumstances, they should:•

escalate a case to additional levels of scrutiny; and•triangulate data supporting an individual group’s tax return with otherinformation, including the group’s contracts with other companies,
management information and (where necessary) the group’s data on UK
internet traffic to help understand completeness, and potentially identify
additional revenue streams within groups;bestimate the potential tax gap for DST (the difference between total theoretical
tax liabilities and the amount that has been paid) separate from any HMRC
calculation of the overall tax gap. For example, by comparing total revenue
with macro-economic data since the COVID-19 pandemic began and dataon business sectors not initially expected to be in scope for DST;cdevelop and implement a plan to identify, and raise awareness among, businessgroups that are unaware they may be liable for the UK DST, particularly those
without a physical presence in the UK; andddevelop a contingency plan for enforcement against business groups that
do not have a physical presence in the UK and fail to engage with HMRC,
after exploring the available options. This could include discussions with tax
authorities in other countries that operate a digital services tax and have
similar interests, to ensure there is a clear pathway for enforcement.