The UK government has announced a digital services tax on the revenues of big tech giants aimed at raising £400 million a year.

Setting out his 2018 Budget, Philip Hammond, the chancellor of the exchequer, announced that a narrowly targeted group of “established tech giants” will be taxed two per cent on the money they make from UK users from 2020 to ensure that multi-billion dollar global companies pay their "fair share".

The levy, which is expected to fall on social media giants like Facebook, technology firm Apple and search engine Google, has been rumoured since Hammond floated the idea of an ‘Amazon tax’ to target the profits of the US e-commerce giant.

To be liable for the tax, digital platform firms must generate at least £500 million in worldwide revenues on an annual basis.

The chancellor sought to underline the fact that profitable big tech companies- and not tech start-ups- would be subject to the tax.

"This will be a narrowly targeted tax of UK revenues of specific business models, designed for established technology giants rather than startups to shoulder the burden," he said.

He also emphasized that the new tax would not be applied to online sales of goods and services, as this would be unfairly passed on to the consumer, but to the turnover made on these sales.

Addressing MPs in the UK parliament, he said: “The rules of the game must evolve now if they are to keep up with the digital economy.”

“Digital platforms delivering search engines, social media and online marketplaces have changed our lives, our society and our economy, mostly for the better. They also pose a real challenge for the sustainability and fairness for our tax system… the rules have not kept pace.”

Facebook has been criticised for paying £15.7 million of UK corporation tax despite revenues of £1.2 billion reported last year. Amazon’s UK division paid £1.7 million in taxes last year despite profits trebling to £72.3 million.

The chancellor said that the government has been working with the OECD and the European Commission to reach international agreement on a digital tax for large tech companies but explained that progress towards consensus had been “painfully slow” and that we “cannot talk forever so we will now introduce a UK digital services tax.”

"It is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here," he said.

The chancellor said a UK digital services tax would be consulted on whilst international agreement was sought. If a global alternative is found, the government may choose to adopt the international agreement instead of the UK-only digital services tax, he said.

Responding to the announcement, Chris Smith, head of community at LendTech firm Kajima UK, said: "Any attempt to ensure some of the large tech companies pay their fair share of tax is welcome, particularly given the Chancellor has protected small technology businesses by setting a worldwide revenue threshold of £700m, in line with European Union proposals."

However, many commented that the government's expected tax receipts of £400million from the levy would not be high relative to the profits made by tech giants from UK customers.

Labour Party leader Jeremy Corbyn labelled the measure "too little, too late".

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