Rachel Reeves is gearing up to review a £700m tax on American tech giants as Donald Trump escalates a global trade war.
The Chancellor will this year reassess the digital services tax (DST), which risks becoming a flashpoint as Britain attempts to avoid being slapped with tariffs by the US president.
Ahead of the review, Ms Reeves is expected to face intense pressure from the White House and companies potentially affected by the tax, including the likes of Apple, Amazon and Google.
It comes as Mr Trump seeks to expand his trade war, having already imposed tariffs of 25pc on Canada and a 10pc levy on China. A separate 25pc levy on Mexico has been delayed for a month.
He has already said that duties on imports from the EU will “definitely happen”, while also warning that the UK is “out of line” on trade.
Rachel Reeves is expected to face intense pressure from the White House to roll back the UK’s digital services tax – Peter Cziborra/PA
However, the president has signalled that a compromise “can be worked out” to avoid potential tariffs on the UK.
As part of any agreement with the US, experts have warned that Mr Trump is likely to seek concessions on the UK’s tech tax, which will increase pressure on Ms Reeves.
The digital services tax was introduced in the UK in April 2020 and currently charges companies a 2pc tax on their UK turnover, last year raising around £678m.
John Denton, secretary general at the International Chamber of Commerce, said: “I think there will be a lot of pressure put on the UK on this particular issue.”
Mr Trump has long rallied against the digital services tax, even attempting during his first presidential term to sanction countries that introduced the levy.
Much of the criticism in Washington is based on the view that the tax unfairly targets American businesses given their dominance of the global tech sector.
Marco Forgione, director general of the Institute of Export and International Trade, said: “The sense that US-based businesses, particularly the so-called tech bros, are being targeted specifically is something that he’s seemingly not willing to accept.
“He’s absolutely trying to create the freest, low-tax opportunity for those businesses as possible.”
In response to the threat of tariffs, Sir Keir Starmer has called for an “open and strong” trading relationship between America and Britain.
Speaking on Monday, the Prime Minister said: “On the question firstly of tariffs, obviously, it’s early days and I think what’s really important is open and strong trading relations.
“That’s been the basis of my discussions with President Trump and I know that intense US-EU discussions are planned.”
However, Pascal Saint-Amans, formerly director of the Organisation for Economic Cooperation and Development (OECD)’s Centre for Tax Policy and Administration, warned: “The Trump administration will indeed take sanctions against countries that have enacted DSTs.”
Nigel Farage, Reform UK leader, said President Trump would “fight hard for US tech”, adding that taxes on tech giants was an area that Elon Musk, who leads a new Department of Government Efficiency were “very concerned about”.
He said: “Clearly, the UK has got to make some decisions about its competitive position with regards to American tech and the EU as well.
“[Digital taxes] are something that gets talked about and Trump will stand up and fight for American companies.”
Britain’s digital services tax was supposed to be a temporary measure that would eventually be replaced by OECD tax reforms.
But the OECD had not achieved consensus on these plans and they cannot be enforced without US support. Mr Trump has since signed an executive order effectively pulling the US out of the OECD’s global corporate tax agreement.
Although the £678m in Treasury receipts from the UK’s DST is a sizeable sum, and larger than the £520m Ms Reeves will raise from her inheritance tax raid on farmers and businesses, it is the kind of figure that the Treasury could feasibly forego in order to maintain relations with the US.
David Henig, director of the UK Trade Policy Project, said the Government would be closely examining what potential concessions it could offer Mr Trump.
Mr Henig said: “I am absolutely sure there is one long list which says ‘here are all the things we could list’.”
The UK is drawing up contingency plans to retaliate against potential US tariffs, officials told the FT.
A Treasury spokesman said: “All taxes are kept under review and the 2025 review of the digital services tax has been planned since it was implemented in 2020 – so it would be wrong to imply any intention to repeal the tax from this.”
As well as the digital services tax, it is understood that the Online Safety Act, which regulates online speech, is also a particular concern for the president’s administration and is likely to be an area for negotiation in a potential trade deal with the UK.
A source close to the administration said: “[The administration] hates it. Not just the administration, every senator, particularly Republican senators and congressmen.
“Congress has been saying that [it is a concern] ever since it was enacted. Those in the administration are saying the exact same thing. Many of them who were in Congress are now in the administration.”
Meanwhile, Mr Trump’s tariff announcements over the weekend triggered market turmoil on Monday.
The FTSE 100 fell by 1pc while traders ramped up their bets on interest rate cuts this year. The pound jumped by 0.88pc against the euro on hopes that the UK will escape direct tariffs.
