The UK is working on options to soften the impact of its digital services tax on US technology companies to help secure a tariffs deal with the White House, after the Trump administration played hardball on the issue.
The British government is open to a range of possibilities, including changes to the 2 per cent flat rate of the tax, and to its features, said people briefed on the discussions between the UK and US.
The tax could continue to garner significant revenue for the Treasury even if some of its features changed, the people added.
Such changes could include exempting some sectors from the levy, increasing the tax-free allowance on revenues to significantly above £25mn, or applying the tax to profits rather than revenues.
Companies that run online marketplaces, search engines and social media companies are all subject to the tax at present, irrespective of whether they make profits in the UK.
Fierce negotiations are under way with US President Donald Trump’s team to see whether Britain can dodge punitive US global “reciprocal” tariffs, set to be announced on April 2.
Sir Keir Starmer, UK prime minister, and Trump spoke on Sunday night to discuss “progress” on economic trade deal negotiations, Downing Street said on Monday.
Jonathan Reynolds, UK business and trade secretary, was told on a visit to Washington last week that Britain must change its tax regime to win any carve-out from US global reciprocal tariffs.
“When the UK team got to Washington, they said: ‘Let’s talk about an economic deal that involves closer co-operation in tech and AI’,” said one person briefed on the talks. “The US side said that was of no interest to them and demanded to know what could the UK offer in terms of tax.”
British government officials confirmed that tax changes were the principal US demand. The Treasury declined to comment.
Trump has claimed that the value added tax levied by European countries, including the UK, as well as digital services taxes are discriminatory against US companies.
Britain’s VAT regime is unlikely to be ripped up, since it raised a massive £169bn last year for the cash-strapped Treasury. The digital services tax, by contrast, is expected to raise some £800mn in 2024-25.
The flat rate 2 per cent tax, which hits tech giants including Alphabet, Meta and Amazon, is applied to companies with global revenues in excess of £500mn, and is applied on revenues above £25mn derived from the UK.
Chancellor Rachel Reeves defended the principle of the tax on Monday. “The digital services tax is hugely important,” she said. “It brings in around £800mn a year and ensures that companies pay tax in the country that they are operating in.”
Reeves suggested it would not be scrapped altogether, adding: “We will continue to make sure the businesses pay their fair share of tax, including businesses in the digital sector.”
Dan Neidle, a tax expert, said he believed the tax should be abolished because it was “performative” and did not raise much money.
“The argument that it’s discriminatory is kind of true,” he said, noting that the levy only targeted a sector where the US had particular strength globally.
He added that the US saw the tax as discriminatory because it applied to revenue rather than profits. “You can be [carmaker] BMW or [champagne house] Laurent-Perrier and you’re not subject to a tax on your revenue,” he said. “But if you’re an internet company you are.”
