The UK government’s apparent willingness to reduce the Digital Services Tax (DST) rate to placate the Trump administration and potentially secure exemptions from US tariffs represents a concerning development in UK’s tax policy. As recently reported by The Guardian, the government is considering reducing the headline rate of the DST whilst simultaneously expanding its scope to include more companies from other countries.
This potential backsliding on tax policy raises serious questions about the UK’s commitment to addressing the fundamental challenge of ensuring tech giants pay their fair share. Given international tax reforms led by the OECD appear to have reached a (potentially permanent) impasse weakening the DST sends precisely the wrong message to multinational corporations deriving huge revenue and profits from UK customers.
A proven revenue generator under threat
Since its introduction in April 2020, the UK’s DST has raised significantly more revenue than initially forecast by HMRC. In 2021-22 18 business groups paid £380 million in DST – roughly equivalent to what these same groups paid in Corporation Tax. This demonstrates the vital role the DST plays in ensuring digital giants make a modest contribution to the public finances.
DST receipts have grown strongly since, raising £800 million in 2024 and forecasted to reach £1.2 billion by 2030. Indeed, political parties including the Liberal Democrats and Greens backed increases to the DST rate in their manifesto for last year’s general election, to raise additional revenues. Any reduction in the headline rate, or full abolition of the tax, represents a potentially substantial loss of revenue which would need to be made up for by further spending cuts or hikes in taxes elsewhere.
Widening the scope: potentially beneficial, but questionable timing
The proposal to broaden the ‘base’ that DST applies to could bring additional companies within the scope if the tax remains in place. The UK Government committed to review the operation of DST during 2025, given it’s been in place for five years. Rather than making hasty changes in response to trade pressures, this scheduled review would be the appropriate time to consider modifications to improve the way the tax functions and how HMRC ensure compliance by companies affected by it.
Expanding the categories of activity that the tax relates to (e.g. AI platforms and content), or reducing the thresholds for corporate groups (currently £500m global revenues, of which £25m directly related to UK customer data and engagement) could potentially strengthen the tax. This might also address inaccurate US claims that the DST as it stands, discriminates against American tech giants.
Many groups are already required to file DST returns even if the amount due is low or zero because of the £25m UK relevant revenues threshold that acts as an allowance across in-scope activities. Lowering this threshold would create minimal additional administrative burden for HMRC or reporting companies, as the compliance systems are largely in place.
However, widening the base specifically to fund a cut to the headline rate for the largest companies is problematic. It implies the overall yield is optimal when there’s little supporting evidence. The DST was designed to capture a proportion of the revenue and profit of geographically mobile businesses which the current international tax regime struggles to cope with. It disproportionately affects US headquartered companies precisely because they have monopoly power and derive substantial revenue and profits from these activities. DST applies to all companies that meet the thresholds wherever they are incorporated – it’s not specific to those based in the USA.
The consumer cost shifting problem
Major digital platforms have admitted using their monopoly power to shift the burden (the ‘incidence’) of the UK’s DST onto their users through increased fees. The proposed changes do nothing to address this fundamental problem. If anything, expanding the scope to smaller companies that lack the market power of giants like Amazon, Google’s parent Alphabet, and Facebook/Instagram’s parent Meta could create an uneven playing field where smaller firms bear a proportionally higher burden as they would have fewer opportunities to deflect the cost of an expanded DST onto their users, instead having to bear the brunt of the tax themselves.
Setting a bad precedent
By capitulating to US pressure, the UK sets a dangerous precedent that undermines its tax sovereignty and signals to other large economies that tax policy can be influenced through trade threats. Such a concession would weaken the UK’s position in future international tax negotiations and potentially derail progress toward a more comprehensive solution to the problem of multinational tax avoidance.
A multilateral approach abandoned
The UK’s DST was always intended as a stopgap measure until a comprehensive international solution could be implemented. With OECD reforms still seemingly distant, and the US and UK blocking progress on the UN Tax Convention, unilateral DSTs have emerged as a pragmatic approach to addressing profit shifting in the digital economy.
The proposed EU-wide DST represents a promising multilateral development, at a higher rate than existing unilateral DSTs, that could strengthen the international approach to digital taxation. If the UK Government weakens or abandons DST we undermine positive momentum toward collaborative solutions. With a trade war and reciprocal tariffs being considered by the EU, the UK risks isolating itself in the fight against corporate tax avoidance from its largest trading bloc.
A false economy at a time of fiscal constraint
At a time when public finances are under immense pressure, with cuts being imposed across government departments, surrendering legitimate tax revenue from some of the world’s most profitable companies represents a false economy. The £800 million currently raised by the DST is not an insignificant sum – it funds vital public services.
While minimising damage from global trade wars is understandably a priority, the UK would be unwise to sacrifice tax justice and sound fiscal policy at the altar of trade expediency. Digital Services Taxes represent one of the few effective tools currently available to ensure tech giants contribute fairly to the societies from which they profit so handsomely. Any modifications to this tool should enhance, not diminish, its effectiveness.
Rather than making ad hoc changes in response to trade pressures, the government should maintain the current DST structure until the planned 2025 review, when evidence-based modifications can be properly considered.
