National Audit Office: Digital Services Tax investigation

In a recent report the National Audit Office examines HMRC’s implementation of Digital Services Tax.

In a recent report the National Audit Office examines HMRC’s implementation of Digital

On 23 November 2022, the National Audit Office (NAO) published a report on its investigation into UK Digital Services Tax (DST). The report examines HMRC’s implementation of DST and its operation in its first year. The findings highlight that HMRC received much more in DST receipts than was initially forecast – actual receipts were £358 million compared to the estimated £275 million. There were several reasons for this, including groups paying more DST than expected, groups paying DST that HMRC had not initially identified as in scope, and businesses not seeking to reduce or remove their DST liability within the law as HMRC had expected that they might. In this article we look at the NAO’s findings including in relation to what might happen next, as DST is replaced by Pillar One.

Revenues generated by DST

In addition to the NAO’s finding that HMRC received much more in DST receipts than originally forecast, the investigation also found that in 2020-21:

  • 18 business groups paid DST;
  • Around 90 percent of DST revenues for 2020-21 were provided by just five of those 18 groups;
  • DST accounted for seven percent of tax paid by the 18 business groups; and
  • Most digital business groups that pay DST now pay more in DST than they do in corporation tax.

Stakeholder engagement with HMRC

According to the NAO’s report, those who submitted DST returns were broadly positive about their engagement with HMRC. However, some did report less favourable experiences, with one commenting on long waits and a lack of information when contacting HMRC’s helpline.

Compliance risks

At the time the NAO’s report was written, HMRC’s compliance work for DST for the 2020-21 tax year was ongoing, but no tax losses had yet been identified. Overall, HMRC consider the risk of tax evasion to be low, as the associated reputational risks to businesses would likely outweigh any financial benefits.

Looking ahead the report highlights that this position may change as more groups are identified as being potentially liable for DST. To prepare for the potentially larger number of groups liable to pay DST in the future, the NAO recommends that HMRC:

  • Set out criteria to ensure their teams are able to consistently identify all business, groups, companies and sources of revenue that are in scope;
  • Estimate the potential tax gap for DST;
  • Plan how they will identify groups that are unaware that they may be liable for DST and raise awareness among them; and
  • Develop a contingency plan for businesses that have no physical presence in the UK and fail to engage with HMRC.

What next?

DST is a temporary solution to taxing the digitalisation of the economy and is expected to be replaced by the OECD’s Pillar One. According to the NAO’s report, HMRC have not yet been able to estimate how much tax revenue they will collect under Pillar One, as the rules are still being developed. However, it is expected that the number of businesses currently paying DST that will go on to pay the tax under Pillar One in the UK will be very small.

Also not yet known is the impact on tax receipts of an agreement reached last year between the UK Government, the US, and certain other countries (see this KPMG International Tax News Flash). This will see DST-paying groups that are also within the scope of Pillar One able to reduce their future corporation tax liability by the amount that their DST payments exceed the tax that would have been due under Pillar One during the transition period between political agreement on Pillar One and it coming into effect.