What the 2% Digital Services Tax Means for Online Advertisers
The UK government has announced a digital services tax which will be imposed on digital platform providers including Google, Microsoft, Amazon and Facebook. These organisations will pay an additional 2% tax on their online revenue generated in the United Kingdom that comes into force on 1st November 2020. Businesses who use these advertising services may see prices rise by 2% in line with the tax.
Who will be affected by the digital services tax?
The digital services tax is applied to businesses that “provide a social media service, search engine or an online marketplace to users in the United Kingdom.”. Businesses whose worldwide revenues are over £500 million, with over £25 million of that coming from UK users, are liable for this tax. There is also a threshold of £25 million, so eligible businesses will only be taxed on revenue from UK users above this figure.
The government’s website states the tax is aimed at “large multinational enterprises”, meaning it is applied to digital behemoths like Microsoft, Apple and Twitter. However, advertisers using many of these platforms are expected to see their costs increase as a result.
Why was this tax introduced?
The tax was proposed in a 2018 UK budget and, after multiple iterations, came into effect on 1st April 2020. It’s understood that the tax was brought in to boost the UK economy and create a level playing field for businesses. Online advertising and selling platforms have benefitted from the coronavirus pandemic due to the impact on in-store shopping. Amazon’s revenue increased by 40% in a record-breaking second quarter in 2020.
American corporations including Amazon and Apple have been criticised for not paying their share of taxes in the United Kingdom. This tax aims to increase the tariffs paid by these organisations specifically for their activity in the UK, bypassing the loopholes some organisations use based on their transatlantic locations. According to the government, this will improve the “misalignment between the place where profits are taxed and the place where value is created.”.
The digital services tax is not designed to be a long-term solution. The government website states that it is a temporary measure which will be dis-applied when an international replacement is implemented. It is expected to raise £400 million in extra revenue for HMRC by 2021.
How will the digital services tax impact your business?
Businesses who use these advertising services will be impacted by the news that some of the affected corporations will be increasing costs. This means advertisers will see prices rise by 2% in line with the tax.
For Google Ads customers, the additional 2% will be taxed separately to your advertising costs. These costs will be applied from 1st November 2020 and added on top of your account’s budget. For businesses who pay manually or have prepayments set up, the fees could be charged after their budget is spent.
You may need to manually factor these additional costs into your metrics. The additional tax won’t be calculated in your campaign’s conversion, cost-per-click or cost-per-acquisition metrics. For small spends, this may not have much of an impact but if your business is heavily reliant on pay-per-click services, this is something you’ll need to consider when reporting on your ROI.
Microsoft Advertising including LinkedIn will not be applying any additional cost to advertisers. They will be absorbing the 2% tax, meaning it will not be passed on to sellers.
While Amazon is not applying the charge to its advertising service, it will be passing on the cost in the form of increased prices for sellers using the platform. Storage, referral, fulfilment and multichannel fulfilment fees will also increase by 2%.
The good news for social advertisers is that Facebook has announced it will not be increasing prices. Social advertising is one of the most established pay-per-click services which helps businesses with brand awareness and revenue generation.
Paid search revenue increasing in certain industries
While many of the headlines around COVID-19’s negative overall impact on the economy, there are a lot of positives for businesses using these platforms. A number of sectors have seen an increase in impressions, clicks and conversions, including:
- Business management services
- Financial services
- Charities and non-profits
- Medical and health services
- Beauty and skincare
- Gift baskets and flowers
The charity and not-for-profit sector, for example, has seen a 20% increase in search ad conversions, while increased search volumes in beauty and skincare have driven down costs-per-click. So, while advertisers are looking at an increase in their costs, there is also the potential for an increase in revenue.
If your business is looking for more information on the 2% tax increase or how you can maximise your return on investment from online advertising, use the enquiry form below to get in touch with Mediaworks’ experts today.