Digital Services Tax: will Reeves let big tech off lightly to avoid tariffs?

Big tech tax receipts could be about to plummet as UK chancellor Rachel Reeves mulls a reduction in the Digital Services Tax (DST).

The DST taxes big tech companies – most of which are US-based – on their revenue from the UK, at a rate of 2%. It raises around £800 million annually for the UK Treasury.

That’s a significant amount of revenue for a chancellor currently overhauling benefits for disabled people in an attempt to navigate her way through an economic snowstorm of inflation and rising borrowing costs in order to meet her own self-imposed spending rules.

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Despite the challenges, Reeves hinted to the BBC’s Laura Kuenssberg on Sunday (23 March) that she is considering reducing the levy in a bid to cosy up to US president Donald Trump and reduce the risk of him imposing import tariffs on the UK.

“We're in discussions at the moment around a whole range of things around tariffs with the United States,” Reeves told Kuenssberg. “We will continue to operate on that principle that you should pay taxes in the country in which you operate. And that's really important for UK based businesses as well, that they don't face an unfair disadvantage from companies that aren't paying their taxes in Britain.”

Pressed on whether that meant that a tweak to the DST was under consideration, though, Reeves replied: “We’ve got to get the balance right, and those discussions are ongoing… we do not want to see British exporters subject to higher tariffs” – seemingly leaving the door open for the tax to be reduced or even ditched if it meant getting a favourable trade deal from the US.

The possibility has drawn criticism from Labour’s opponents, particularly the Liberal Democrats.

“Slashing taxes for the social media giants whilst cutting welfare for millions of the most vulnerable… would be tantamount to robbing disabled people to appease [Elon] Musk and Trump,” said Daisy Cooper, Treasury spokesperson and deputy leader of the Liberal Democrats.

“The Government’s priority should be standing up for the British people, not bowing down to Trump and his US billionaire cronies. That means asking social media giants to pay their fair share,” Cooper added.

US ambassador Lord Peter Mandelson first signaled potential changes to the DST on Friday, telling the FT that “the tax itself is under discussion”. Cutting the tax on digital services is gathering increased attention ahead of Reeves’ Spring Statement, due on Wednesday.

It is expected that Reeves’ reduced fiscal headroom will force her into announcing spending cuts, which could cause political difficulty given Labour promised an end to “Tory austerity” during the election campaign.

The Treasury has not responded to a request for further comment beyond Reeves’ statements in the BBC interview.

What is the Digital Services Tax?

The Digital Services Tax (DST) came into effect in April 2020 and levies a 2% tax on the revenue of search engines, social media services and online marketplaces from UK users.

It applies to business groups with combined worldwide revenues from the services in question of more than £500 million, of which at least £25 million must be derived from UK customers. In other words, it is only aimed at large digital businesses; this isn’t being levied on small, up-and-coming companies.

The first £25 million of revenue for companies that meet the thresholds is also exempt.

Tech bosses in the US want the tax rolled back. According to the FT, Mandelson is looking to forge a tech pact between the UK and the US, which could include collaboration on developing artificial intelligence (AI).

The DST, in its current form at least, could be a sticking point in terms of these negotiations.

Is cutting the DST to avoid tariffs a good idea?

Mandelson's hints that the DST could be altered in a bid to curry favour with US tech is different from the rationale Reeves gave Kuenssberg for adjusting the levy. In her words, the reason for adjusting the DST would be “to preserve free and open trade” by avoiding UK exporters being hit by Trump tariffs.

Is this the right approach?

That depends on how hard the UK might be hit by any “reciprocal” tariffs that Trump imposes on the UK at his much-awaited “tariff day” on 2 April. So far, the UK hasn’t been hit too hard by tariffs; aluminium and steel exports to the US account for just 0.1% of UK GDP.

However, further-reaching tariffs could impact UK-US trade, and the US is the UK’s largest trading partner.

Reeves told Kuenssberg that she wants to see trade barriers come down with the US, as well as with Europe, saying that she believes “in free and open trade”.

She conceded, though, that the risk of tariffs for the UK may not be as high as it is for other countries that have a more one-sided trading relationship with the US.

“President Trump is rightly concerned about countries that run large and persistent trade surpluses with the US,” Reeves told Kuenssberg. “The UK is not one of those countries. We have balanced trade between our countries.”

The Liberal Democrats have argued that the DST should instead be increased to 10% in order to fund increased defence spending. They argue that doing so would provide £3.3 billion extra for the government to spend in 2025-26, rising to £4.5 billion by 2029-30.