What the UK digital services tax means for digital advertisers

The UK Digital Services Tax (DST) is set to increase costs for digital advertising in the UK; however only certain platforms will be passing this increase on to the advertisers. The team at Digital Fuel Marketing have reviewed each platform’s policy (correct as of October 2020) to see how the new tax will affect advertisers. See our roundup below for more information.

The UK’s Digital Services Tax Policy Paper was published on 11th March 2020. The paper outlines a new 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users.

The policy paper states:

“Legislation will be introduced to establish a Digital Services Tax.

The Digital Services Tax will apply to a group’s businesses that provide a social media service, search engine or an online marketplace to UK users. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than ￡500 million and more than ￡25 million of these revenues are derived from UK users.

If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%.

There is an allowance of ￡25 million, which means a group’s first ￡25 million of revenues derived from UK users will not be subject to Digital Services Tax.”

With the high revenue threshold set for digital companies with at least ￡500m in annual revenue, and specifically ￡25m in the UK; the main targets of the Digital Services Tax are the biggest digital media companies, including Google, Amazon and Facebook. 

At present Google and Amazon have announced that they will be passing the cost of the UK digital services tax on to advertisers, whilst Facebook is intending to absorb the cost.

Amazon

Amazon claim the 2% tax on revenues made in the UK will be passed on to sellers but it will not be adding the charge to the cost of advertising on its platform, as reported by The Guardian.

Amazon announced the increase in August, with a start date of 1st September. Their fee applies to a range of their services, predominantly their third party sellers and FBA (Fulfillment by Amazon) products, but will not apply to advertising. 

The tax will not be added to Amazon’s direct product sales as the new tax is not being levied on sales, which would also penalise online retailers such as Tesco and John Lewis, but on the service fees that companies such as Amazon and Google charge third parties (including digital advertisers).

Google

In September, Google announced that from November it will charge an additional fee for ads served on Google and YouTube due to the UK’s digital services tax. If you use Google’s service to advertise, you are likely to have been contacted by them already regarding this increase. The move will increase advertisers’ costs in line with the amount Google is set to pay in new digital services taxes: 2% in the UK (and 5% in Austria and Turkey). It is estimated that this will add more than ￡120m to marketers’ costs annually. 

Google Ads Help states: “As of November 1, 2020, a 2% UK DST Fee will be added to your next invoice or statement for ads served in the United Kingdom. The fee is driven by the new digital services tax in that country.”

The fees will be added to the advertiser’s Google Ads costs once a month, to be paid the next time they are charged. These fees will also be added on top of the account budget if one has been set up. 

As an example, if you have a budget of ￡1,000 and accrue ￡20 in UK DST Fees for ads served in the UK, you’ll be billed ￡1,020 (plus any taxes, such as VAT, that may apply in your country). This bill will either be sent direct to the advertiser, or if you are working with a partner it will come via your agency.

Billing in this way means that all calculations done within the account itself will not reflect the additional DST fees. Calculations like cost-per-click (CPC), cost-per-conversion and cost-per-acquisition (CPA) will reflect the media spend only and not additional taxes. Advertisers and their agencies should factor this into their calculated return from advertising when reporting on campaign effectiveness. 

Facebook

With Google and Amazon passing on DST costs to their advertisers, Facebook, which makes an estimated ￡4.2bn in ad revenue in the UK, was expected to follow suit. However, at this time, Facebook are absorbing the DST costs and will not be adding them as an additional charge to their advertisers.

As reported by The Telegraph, a spokesperson for Facebook explained:

“We are continuing to assess the full impact of the UK law and we are sensitive to any potential repercussions on customers advertising in the UK. At present, we don’t intend to pass on the costs of the Digital Services Tax incurred by Facebook to our UK customers. 

However, we will continue to review the impact of the DST and similar legislation being considered globally, which may affect our position in the future.”

Whilst this statement gives Facebook plenty of room to change their approach in the future, for now the cost of advertising on Facebook will remain unchanged.

What the UK digital services tax means for digital advertisers

As it stands, advertising on Google is set to get 2% more expensive from 1st November 2020, whilst advertising costs for Facebook and Amazon will remain stable for now. 

For advertisers and their agencies, costs for advertising on Google will need to be reviewed when November’s bill is received. Whilst this additional cost is relatively low, the DST will still have an impact for advertisers - particularly those running on high volume, low margin activity. Now more than ever, well optimised campaigns are essential. Reviewing campaigns regularly for their efficacy, and running multiple A/B tests to make sure only the most effective continue to run will ensure the 2% increase is mitigated by strong ROI.

Looking for additional support with your digital advertising campaigns?

The Digital Fuel Marketing team offer marketing consultancy services alongside management of your digital advertising spend in the UK and globally, supported by a worldwide team with offices in Australia and a presence in the US. If you’re looking for support with your digital marketing from an expert agency, get in touch with us today.