Digital Services Tax – Interaction with VAT Reverse Charge
Recently, in dealing with several digital services businesses particularly in the areas of on-line advertising and lead generation, a question arose about how large multi-national search engines, social media or online marketplace sites are dealing with their responsibility to pay to the UK government the Digital Services Tax. This is a tax that began in April 2020 and is charged at 2% on revenues derived in the UK – for the details see here.
It transpires in the Term and Conditions section of one such corporate there is the ability to pass this tax cost across to its customers as a “Digital Services Tax Surcharge”. How does this affect this business customer here in the UK you may ask?
These multinationals are based outside of the UK and therefore when they supply their advertising services to UK Business customers: corporates, universities, charities etc, they – the supplier – do not account for the UK VAT as it is the customer that works out the 20% VAT due on the supply and the customer pays this VAT over to HMRC by accounting for a VAT reverse-charge on its own VAT return.
If the customer can reclaim all its VAT on costs the VAT reverse-charge accounting has no cost impact for them. However, if the customer cannot recover all their VAT because they are partially exempt or have non-business activities, the reverse charge VAT is an additional cost to them.
The impact of these suppliers passing across a tax charge, that was levied on their own revenue generation activities, is that this additional recharge increases the value of their supply to their UK business customer. As a result, the cost value increases and therefore there is a corresponding increase in the amount of VAT the business customer pays over to HMRC and potentially cannot recover.
It is doubted that this is the impact that UK Government envisaged when the tax was introduced!
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