Digital Services Tax

Q: What mistakes do groups make?

Testing companies, not the group. The thresholds use revenues across all group members, so a small UK subsidiary of a large platform group can be liable. Treating every online sale as marketplace revenue. Selling your own goods online is not a marketplace activity. The marketplace definition needs users selling to other users. Forgetting advertising. Advertising revenue that benefits significantly from a platform is part of that platform's revenues. Missing the election. The alternative charge only applies if a valid election is made in the return, including by amendment. It is per category, so a group can elect for a loss making marketplace and leave a profitable search engine on the standard basis. Using the wrong exchange rates. Groups that report in another currency must convert using the same accounting policies and exchange rates as in their consolidated accounts. Weak evidence of user location. If HMRC does not accept the calculation, it can open a compliance check, and the location evidence is usually the first thing examined. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Digital Services Tax (DST) is a 2% tax on the UK revenues of large groups that provide a social media service, an internet search engine or an online marketplace to UK users. It applies only where the group’s worldwide digital services revenues exceed £500 million and its UK digital services revenues exceed £25 million in an accounting period, and the first £25 million of UK revenues is not taxed. Groups with a low or negative UK operating margin can elect for an alternative charge that can reduce the bill well below 2%.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

Where does Digital Services Tax come from?

DST is set out in Part 2 of the Finance Act 2020, sections 39 to 72. Section 39 charges the tax on “UK digital services revenues” arising to a person in an accounting period and makes HMRC responsible for collecting it. It is not a tax on profits and is separate from corporation tax: it is calculated on revenue, which is why the alternative charge for loss making or thin margin activities exists. Section 71 required the Treasury to review the tax before the end of 2025 and lay a report before Parliament.

DST should not be confused with the VAT rules for digital services, which deal with where a supply is taxed rather than with a charge on platform revenue. For that topic see VAT on digital services to overseas consumers.

Which activities are caught?

Section 43 defines a “digital services activity” as providing one of three things:

A social media service: an online service whose main purpose, or one of its main purposes, is to promote interaction between users, where making user generated content available to other users is a significant feature.
An internet search engine: a search facility that only searches the material on the provider’s own website (or closely related websites) is not a search engine for DST.
An online marketplace: an online service whose main purpose, or one of its main purposes, is to facilitate the sale by users of goods, services or other property to other users. Hiring counts as selling.

Revenue from an “associated online advertising service” that derives significant benefit from its link with one of these activities is treated as part of that activity. Section 45 excludes online financial marketplaces, meaning a marketplace where more than half of the provider’s revenue from it comes from facilitating trading in financial instruments (including insurance contracts), commodities or foreign exchange. An online shop selling its own stock is not a marketplace because the sales are not made by users to other users. For the separate reporting duties that apply to platforms, see digital platform reporting.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

Which groups have to pay?

The test is applied to the whole group, not to individual companies. Under section 46 the “threshold conditions” are met for an accounting period if:

the group’s total digital services revenues worldwide exceed £500 million; and
the group’s UK digital services revenues exceed £25 million.

Both figures are reduced proportionately if the accounting period is shorter than a year. If the conditions are met, section 47 makes every member of the group liable for its share. HMRC’s registration guidance repeats the same two tests and says the group must register within 90 days of the end of its first DST accounting period.

What counts as a UK user?

Section 44 defines a UK user as a user it is reasonable to assume is normally in the UK (for an individual) or established in the UK (for a business). Group companies and their employees acting for the business are not users. Section 41 then attributes revenues to UK users through five cases. For example, marketplace revenue is UK revenue if a UK user is a party to the transaction, and advertising revenue is UK revenue if the advertising is viewed by UK users, with just and reasonable apportionment where an advert is seen by UK and non UK users. Section 42 adds rules for marketplace revenues connected with accommodation or real estate: listings for UK property count as UK revenues, while revenue from overseas property is generally excluded.

How is the standard 2% charge calculated?

Section 47(3) sets out four steps:

Take the group’s total UK digital services revenues for the accounting period.
Deduct the £25 million allowance (reduced pro rata for a short period).
Take 2% of the result. This is the group amount.
Allocate the group amount to each member in proportion to the UK digital services revenues arising to it.

The calculation is on revenue, so expenses play no part unless the alternative charge is elected.

How does the alternative charge work?

Section 48 lets a group elect, in its DST return, to use an alternative basis for one, two or all three categories of revenue (social media, search engine, marketplace). The steps are:

Apportion the total UK digital services revenues between the three categories.
Share the £25 million allowance between the categories in proportion to their revenues, and deduct each share to find the net revenues for that category.
For each elected category, calculate the operating margin: revenues less relevant operating expenses, divided by revenues. If expenses are equal to or more than revenues, the margin is nil.
The tax for an elected category is 0.8 × operating margin × net revenues. Categories not elected stay at 2% of net revenues.

Relevant operating expenses are defined in section 49, and HMRC’s guidance explains which expenses count. Cost of sales, distribution, administration, other operating costs, amortisation and depreciation can be deducted. Interest, acquisition spending, changes in asset valuations and tax costs, including DST itself, cannot.

Because 0.8 multiplied by a 2.5% margin equals 2%, the election only reduces the bill where the UK operating margin on that category is below 2.5%. A category that makes a loss on UK users pays nothing.

Is there relief for cross border marketplace sales?

Yes. Under section 50, if a marketplace transaction involves a foreign user and the revenue is also subject to a similar digital services tax in that user’s territory, a claim in the return removes 50% of the UK revenue from the calculation (and, under the alternative charge, 50% of the related expenses).

What does a worked example look like?

Illustration only. A group operating one social media platform meets both thresholds. Its UK digital services revenues for a 12 month accounting period are £125 million.

Step	Standard charge	Alternative charge (UK margin 1%)
UK revenues	£125m	£125m
Less allowance	£25m	£25m
Net revenues	£100m	£100m
Rate applied	2%	0.8 × 1% = 0.8%
Group DST	£2m	£800,000

If the same platform had a UK operating loss, the margin would be nil and the alternative charge would be nothing. If the margin were 5%, the group would leave the election off because the standard 2% would be cheaper.

How do registration, returns and payment work?

A group chooses a responsible member to deal with HMRC. If it does not, the ultimate parent is the responsible member. HMRC’s guidance sets out these deadlines and duties:

Registration: within 90 days of the end of the first DST accounting period, using the online service.
Payment: within 9 months and one day of the end of the accounting period, quoting the 15 digit reference starting with X. Direct Debit is not available.
Return: within 12 months of the end of the accounting period. The return shows the group liability, each liable company’s share, the allowance deducted, any alternative charge election with the operating margins, and any cross border relief claimed.
Amendments: up to 2 years after the end of the accounting period.
Changes to registered details: notify HMRC within 90 days.
Records: keep them until the sixth anniversary of the end of each accounting period, including the evidence used to decide where users are normally located.

Groups in scope will often also fall within the large business tax strategy rules and the Pillar Two top up taxes, which are separate regimes with their own tests.

What mistakes do groups make?

Testing companies, not the group. The thresholds use revenues across all group members, so a small UK subsidiary of a large platform group can be liable.
Treating every online sale as marketplace revenue. Selling your own goods online is not a marketplace activity. The marketplace definition needs users selling to other users.
Forgetting advertising. Advertising revenue that benefits significantly from a platform is part of that platform’s revenues.
Missing the election. The alternative charge only applies if a valid election is made in the return, including by amendment. It is per category, so a group can elect for a loss making marketplace and leave a profitable search engine on the standard basis.
Using the wrong exchange rates. Groups that report in another currency must convert using the same accounting policies and exchange rates as in their consolidated accounts.
Weak evidence of user location. If HMRC does not accept the calculation, it can open a compliance check, and the location evidence is usually the first thing examined.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.