Online tech giants including Google and Facebook are to be hit with a digital services tax worth up to £400m (NZ$785m) per year, as Chancellor Philip Hammond used the Budget to take the lead in a global push to tax Silicon Valley while limiting the pain felt on Britain's struggling high streets.
But the proposal for what he termed a "narrowly targeted" tax, to be paid only by large companies that are profitable and generate over £500m a year in global revenues, was sharply criticised by some as potentially damaging for the UK's technology industry at a sensitive time as negotiations continue over Brexit.
Some warned that the move, first reported earlier this month by the Sunday Telegraph, could damage the UK's reputation as a stable place to invest.
Russ Shaw, founder of Tech London Advocates, said a unilateral UK tax was the "wrong approach". He said: "Digital tax is a universal problem, and must be taken on in that manner. Any other approach makes Britain economically vulnerable".
Meanwhile, writing on Twitter, Peter Kyle MP pointed out that Sainsbury alone pays £580m in business rates. He branded the proposed tax, geared to level the playing field with the high street, as "pathetically tokenistic".
But Chancellor Philip Hammond said the tax, which is expected to affect about 30 companies, was all about "fairness".
He said: "It's clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business."
He said the tax would be aimed at UK-generated revenues of specific digital platform business models "designed to ensure it is the established tech giants rather than the technology startups which shoulder the burden".
The announcement confirmed that the levy would not be an online-sales tax on goods ordered over the internet as "such a tax would fall on consumers of those goods – and that is not our intention". It instead focuses largely on advertising revenues.
According to a consultation document released after Mr Hammond appeared in the House of Commons, the 2 per cent tax will be applied to the revenues a social media platform generates from revenue targeting adverts at UK users, the revenues a marketplace generates from facilitating a transition between UK users and the revenues a search engine generates from displaying advertising.
It will be rolled out in April 2020, although Mr Hammond said the UK would continue to work with international bodies, the OECD and G20, to attempt to strike an international deal on how to tax tech companies and would not go ahead with its own tax if such an agreement could be reached.
"I'm already looking forward to my call from the former leader of the Liberal Democrats," joked Mr Hammond in reference to former deputy prime minister Nick Clegg, who is to join Facebook as its new global affairs and communications chief. Facebook is expected to be among the hardest hit by the planned tax.
The announcement came despite lobbying efforts by companies including Facebook to stave off such measures, amid mounting criticism over the amount of tax tech giants are paying in the UK compared to the profit they are generating in the region.
eMarketer estimates that Facebook generated nearly £2.3bn in digital advertising revenue for 2017, and Google £4.7bn, but the two paid just £15.7m and £50m in UK tax respectively.
If the Treasury is to take £400m every year from the tax, Deloitte's Zubin Patel said it would need to apply "more widely than just the biggest and most famous companies".
Another tech industry source said the latest measures were a "bit half-hearted" and "not the bold decisive moves" which had been expected.
The enormous complexity of crafting an effective tax was also becoming clear.
According to the government's own estimates, the maximum Google or Facebook could pay under the new tax would be £200m, and the amount is expected to be much less. The OBR admitted that its estimates were "subject to high uncertainty due to the data, modelling and behavioural complexities involved".
The OBR suggested the £400m could be widely optimistic as well, suggesting that the government could lose around 30 per cent of that revenue by 2024 due to companies redistributing their revenue.
The announcement was met with a mixed response on Monday, as some hailed the move as a key to ensuring the giants pay their fair share, while others warned it would damage the tech sector in the long run.
TechUK chief executive Julian David said the approach risked "undermining the UK's reputation as the best place to start a tech business or to invest at a time when the UK needed to enhance its attractiveness.
However, Adam Rose, a partner at Mischon de Reya, said the tax was "possibly the first step towards bringing the UK's tax system for technology dominated services into the modern era".
Vince Cable, the Liberal Democrat leader, added that the tax could help level the playing field, saying "tech giants have got away without paying their fair share for too long".