Donald Trump’s new gilded economic age for the American people came and went, briefly sending every index into the dumpster. No stone was left unturned. Islands with little to no human life were slapped with double-digit tariffs. All nations apart from Russia, of course. Although the reciprocal tariffs have been removed, the UK is still stuck with the same 10% rate.
The UK did well to avoid a more significant duty rate on Liberation Day. The initial tariff resulted in the FTSE 100 falling around 5% as lawmakers in Westminster scrambled to control the damage. The UK lacks any bilateral trade deal with the US, leaving it fully exposed to these new tariff layers with no exemptions. Key UK exports such as autos, aerospace parts, whisky, and pharmaceuticals now face punitive costs, with no sign of alleviation. Trump’s tariffs will be significantly detrimental to the UK economy, with the 25% duty on imported cars potentially putting 25,000 UK jobs at risk alone. In an attempt to stop the bleeding and appease Trump, Starmer is looking at axing the very minimal rate of tax the UK charges its tech companies and, in the process, sell the country’s soul to Silicon Valley.
Go deeper with GlobalData
Economists warn that the UK economy could suffer from the broader impacts of Trump’s trade wars, even without direct tariffs, leading to potential spending cuts or tax increases in the autumn budget. A gloomy spring statement didn’t provide any consolation, given that these tariffs, if maintained for five years, could all but wipe out the fiscal headroom that Reeves desperately desires. Starmer rightly has the economy at the top of his mind. Yet cutting the Digital Services Tax (DST) simply doesn’t make political sense for Sir Keir.
What is the Digital Services Tax
The Digital Services Tax (DST) was introduced in 2020 as a stopgap measure to make tech companies not headquartered in the UK pay tax on revenue derived from UK consumers. Social media companies, online marketplaces, and search engines must pay a 2% rate on all of their UK revenue, raising an estimated £800m ($1.1bn) a year for the UK’s coffers.
The UK tax system in 2020 was woefully out of date in a digital age, as foreign tax companies could shift profits overseas while operating in the UK. While the tax did have some criticism at the time, the combination of the pandemic, the chaos of the 2020 US election, and the DST being shelved for an OECD global wealth tax meant that it drew little ire from Washington.
New Trump in the house
Trump 2.0, however, is a completely different story. Not even a month in, Trump withdrew the US from OECD negotiations on a global tax system. It issued an executive order titled ‘Defending American Companies and Innovators from Overseas Extortion and Unfair Fines and Penalties’, a relatively self-explanatory initiative.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataTrump has formed a tech oligarchy that has likely lobbied him to push against any form of tech regulation, and, given that the tax is a uniform 2%, the large oligarchs around Trump will pay a larger rate of tax, claiming that the tax punishes larger companies. Given the amount of investment and say tech figures have in this new administration, any increase in tax in any part of the world will receive significant pushback from Trump.
Some political commentators wanted to scrap the tax ahead of Liberation Day to avoid exacerbated tariffs, yet, luckily, the UK managed to walk away with the base rate of 10% even without amending the digital services tax. Trump has always viewed foreign economic policy through a transactional lens. His economic and military policies have always been up for renegotiation; take, for instance, the US-Ukraine critical minerals deal. With the UK not considering further reciprocal tariffs like some of its European colleagues, Starmer will reportedly reduce the headline rate of the DST in exchange for the US lowering tariffs on UK exports.
The Goldilocks zone
The UK sits between the US and EU in terms of the severity of tech regulation, although the US has become markedly stricter on tech companies since the Biden administration, a trend that will, at least partially, be continued under the Trump administration.
Chatham House has said that the UK sits in a ‘Goldilocks Zone’ of tech regulation between the US and EU, stating that the UK prioritises sovereignty and growth over stringent regulation. This middle ground between a deregulated tech sector under Trump and an ever more scrutinised tech sphere in the EU is untenable, especially as global tensions rise over tariffs. While all-out trade and ideological war between the US and EU isn’t here just yet, the UK cannot maintain this middle ground—as a nation, it will have to choose a side.
Starmer getting closer to Trump isn’t a good move
Unfortunately, it looks like it will be the US. The route the UK seems to be taking is that of appeasement, with Starmer hoping to secure a transatlantic trade deal between the two nations. Trump is rather favourable of the UK it seems, as the former property tycoon came close to negotiating a deal with former Prime Minister Boris Johnson in 2020. Yet, Starmer’s faith in Trump is misplaced. Trump is weaponising uncertainty, and if the UK aligns with an erratic President, it will pay the price in the long term.
Europe is the UK’s closest ally and trade partner. Only 11% of Brits see Brexit as more of a success than a failure, and only 16% of Brits view Donald Trump favourably according to YouGov. This comes as 55% of British people want to move closer to the EU, indicating that a general shift towards the US is not favourable.
Focusing more on tech policy, eroding the UK’s sovereignty when it comes to tech policy is politically untenable. A 2% tax on UK-derived revenue from Big Tech is practically nothing, all the while tech companies’ evaluations are shooting through the roof. France and Spain have 3% DSTs while Austria has a 5% tax on digital advertising revenue.
Taxing tech companies is unequivocally popular. Given this fact and Trump’s popularity ratings, decreasing tax on tech companies isn’t a particularly sound move.
Starmer needs to look at the polls
Essentially, Starmer needs to look at the polls. Many already think that he lacks a solid platform to stand on, and tech regulation could be a major, popular point that he could benefit from.
Starmer’s popularity isn’t particularly high, sitting at around 22% and taxing tech companies could be a quick and easy way to improve his rating before the next election.
