Last year, the UK government introduced a digital service tax (DST). This tax aimed to take a cut of revenues from advertising platforms. While some platforms absorbed the cost, Google has passed this additional 2% tax onto the advertisers from the 1st of November 2020.
Annoyingly, this tax isn’t included in any of your current spend figures and is billed as a separate line item in your account. Some advertisers have strict budgets to stick to, so they need to include the DST in their reporting.
Luckily, Funnel’s platform makes this incredibly easy to set up and include in your overall advertising costs with a custom metric.
I’ll show you how in the video below.
Quick how-to for adding DST with Funnel custom metrics
Head over to your Funnel account with a connected Google Ads data source, select metrics from the transform menu on the left-hand side, and from there create a new custom metric in the top right.
Enter a descriptive name for this metric, select monetary as the unit, and then a rule-based calculation.
From there, set a data-source specific rule by selecting Adwords from the list of data sources at the top, and then enter the below rule:
When the date is greater than or equal to 2020-11-01, we want to take the value of the Google Ads “Cost” metric and multiply it by 1.02 (adding 2%).
For all other data, set the value to that of “cost.”
Once you have that setup, save the metric, and you should now see an automatic 2% increase in Google Ads spend from the 1st of November 2020.
The taxation of the digitalized economy
What is the UK digital service tax?
Established in the UK‚ the digital service tax (DST) imposes a 2% tax on the gross revenues of large global companies advertising on search engines, social media platforms, and online marketplaces when their revenues come from UK users. DST is applied no matter where the company is. It applies to income earned from 1 November2020
The G20 asked the Organisation for Economic Co-operation and Development (OECD) to consider changing the international tax system to address the challenges of the digitization of the economy. It hopes to reach a global consensus on its proposals by mid-2021. The UK government introduced DST as an interim response to challenges that the digital economy poses for the international corporate tax framework.
When does DST apply?
DST targets large businesses generating more than £500 million in worldwide revenues in digital services and £25m in UK digital services revenues within a year. Yet only revenues exceeding £25m coming from UK users are subject to DST.
What falls under digital services activities?
A group will only be in the scope of DST if it generates revenues from 'digital services activities.' This includes:
- Social media services
- Internet search engines
- Online marketplaces
The definition also includes the carrying on of an online advertising service associated with any of these activities.
Social Media services
It covers businesses that rely on an active and engaged user base to create value.
- To promote interaction between users, including the interaction between users and user-generated content
- Making content generated by users available to other users.
Social or professional networking sites, micro-blogging, video or image sharing platforms, online dating websites, and platforms that exist to share user reviews typically fall in this category.
Internet Search Engine
The HMRC sees it as an online service whose main purpose is to allow users to search for web pages or information across the internet. However, any search tool on a website that allows a user to search the material on that website is not considered an internet search engine.
Online Marketplaces
It covers online services that provide an online market for goods, services, and other property by connecting users seeking something with other users willing to offer it.
It doesn't cover the online sales of e-commerce retailers or online sales generally. It only covers cases where the business acts as an intermediary and matches buyers and sellers rather than where the company is selling its own goods or services.
Calculating digital services revenues
To calculate liability to DST, you need to determine a group's total worldwide revenues from digital services activities.
When it exceeds £500m for an annual accounting period, it will be subject to DST on the amount of those revenues attributable to UK users, known as 'UK digital services revenues', less an annual £25m allowance.
A user is anyone that uses the digital service activity, subject to some limited exceptions. A user can be an individual or a legal person, such as a company.
Annual allowance
There is an annual allowance on the first £25m of UK digital services revenues so that DST is only payable to the extent that UK revenues exceed this threshold.
Rate of DST
DST applies at a rate of 2% on UK digital services revenues above the annual allowance. It is a tax on revenues and not profits.
Disclaimer:This is not meant to be a comprehensive guide on the DST tax rules. If you need guidance, we recommend you consult a corporate tax consultant to review your business activity.