Keir Starmer has proposed a notable tax reduction for major US tech companies in exchange for lower tariffs from Donald Trump’s administration as the UK prepares for potential global trade conflicts.
According to The Guardian, the UK government is considering lowering its digital services tax (DST) rate to appease the US president, while still applying the levy to companies from other nations.
This initiative, signaling a major concession to US tech giants, follows the prime minister’s decision to maintain the tax, which collects £800m annually amid already strained government finances.
When addressing the public on what the White House is calling “liberation day,” Trump is expected to impose tariffs on imports from numerous competing economies, although it’s uncertain whether these will be standard or country-specific.
Key economies, including the EU, are anticipated to respond with their own tariffs while simultaneously negotiating for exemptions. The UK has not yet threatened retaliation, although Starmer states that he is “keeping all options on the table.”
Sources from Downing Street confirmed that the UK has reached a preliminary understanding with US officials regarding a trade agreement focused on technology, aimed at helping the UK secure exemptions from tariffs. Ongoing discussions between officials are expected.
The UK’s trade offer reportedly includes expanding the scope of the DST to cover smaller companies, which is anticipated to increase tax revenue to £1.2bn annually by the decade’s end.
Consequently, the existing 2% tax on the UK revenues of major US tech companies could be reduced. Five companies—Amazon, Meta, Alphabet, eBay, and Apple—have publicly acknowledged their payment of the tax, with some lobbying for a reduction, arguing that it discriminates against larger firms and should be based on profits rather than revenues.
Tax specialists believe that Elon Musk’s X has likely paid this tax in recent years, although the company has not publicly confirmed this. Tech companies with over £500m in worldwide revenue and more than £25m generated from UK users are subject to this tax.
Government sources indicated that broadening the tax’s scope would introduce new expectations for tech firms from other nations to contribute, addressing fairness concerns raised by the White House.
Trump has expressed his objections regarding the impact of DSTs globally on US businesses. In February, he signed an executive order titled “Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties,” which included threats of retaliatory tariffs.
No 10 is optimistic about securing exemptions once a trade deal is finalized, but acknowledges that Trump’s intention to announce sweeping changes suggests the UK should be prepared for potential tariffs of 20% on all goods entering the US.
Business Secretary Jonathan Reynolds stated that the UK is in “the best feasible position of any country to reach an agreement” regarding tariff reductions, while officials pointed to the US president’s assurance to “be nice” to nations maintaining balanced trade relations with the US.
The UK is also believed to have offered concessions on agriculture by reducing tariffs on US beef, chicken, and other meat imports, a move likely to provoke further backlash from farmers who have already criticized the government over changes to agricultural inheritance tax rules.
Nevertheless, sources have made it clear that animal welfare and hygiene standards are “absolute red lines,” ensuring that the bans on importing hormone-treated beef and chlorine-washed chicken will remain enforced.
As ministers prepare for the consequences of Trump’s trade war, economists have cautioned that the UK’s economy may suffer, even in the absence of direct tariffs.
John Springford from the Centre for European Reform remarked, “At a minimum, Trump’s trade wars increase the likelihood of further spending cuts or tax increases in the autumn budget – the extent is still uncertain.”
He added that, regardless of whether the UK faces tariffs, “the more severe costs would stem from an escalating global trade war, regardless of a deal or a lack of UK retaliation. Increased trade barriers would reduce demand in the EU and US, adversely impacting British exports.”
Goldman Sachs analysts have downgraded their economic growth forecast for the UK this year from 0.9% to 0.8%, citing risks from broader trade tensions, even if Reynolds manages to lift direct tariffs.
Emily Fry, a senior economist at the Resolution Foundation, commented, “Even if the UK’s prudent strategy of avoiding retaliation yields positive results, as a small, open economy, it will not escape the ramifications of supply chain disruptions and global growth challenges stemming from US tariffs and potential retaliatory measures.”
When the Office for Budget Responsibility (OBR) released its forecasts alongside Rachel Reeves’s spring statement last week, it cautioned that a retaliatory trade war could disrupt its projections.
OBR committee member David Miles reiterated this warning on Tuesday, emphasizing that sustained 20-25% tariffs on the UK for five years would strip away the £10bn headroom the Chancellor allowed herself against her self-imposed fiscal targets – although he noted it would be “in some ways an extreme assumption.”
Government insiders dismissed claims that any economic deal would depend on the UK’s stance on free speech, clarifying that the two issues are “completely unlinked.” Reynolds stated that free speech considerations have “not been a material factor” during trade negotiations.
