Cloud services pose difficulty for UK tax authorities

News Karrie Kehoe Feb 24, 2012

Businesses warned about potential tax liabilities incurred by cloud services

UK businesses need to be wary of the potential tax liability of revenues and profits generated by cloud services according to a new report from KPMG.

The consulting firm has warned that it is even feasible that UK businesses might be liable for double taxation.

According to Tax in the Cloud, businesses have been advised that they need to be aware that while money can be saved by adopting cloud services, instead of paying IT infrastructure costs, they are entering into murky tax waters.

The consulting firm has advised that UK tax authorities are grappling with the difficulties of transaction classification and how to treat revenues generated by Cloud Services. The issue comes as authorities struggle to determine whether a service has actually been rendered rather than a transfer of property or IP.

Questions have been raised regarding cross-border transactions: specifically if a business’s data is being stored on physical servers in another tax jurisdiction, does that make the company liable for income or VAT taxes in that territory?  It is also unclear what nature and degree of IT activity gives rise to taxable income in a foreign territory.

KPMG has warned that it is unlikely for the matters to be clarified any time soon for UK businesses as there has been a slow response from both the UK department of Revenue and Customs and the OECD on how to evolve the tax system and develop a new set of regulations for cloud transactions.

Mike Camburn, indirect tax partner at KPMG UK stated that the issues stem from an attempt to apply old tax rules to the virtual realm of trade. He commented that, “most tax rules were written at a time when physical goods or services were traded, largely in the same country.” He highlighted the fundamental issue remarking that, “with cloud transactions, determining what is actually being traded, between whom and where is becoming a real challenge.” 

However it seems that the murky waters of tax uncertainty are not enough to deter UK businesses to continue to move towards cloud services. The KPMG report has revealed that 23 percent of UK businesses are already using cloud services and that a further 53 percent are planning to adopt cloud services within the next year. Furthermore it is expected that by 2014 the UK market in software-as-a-service (SaaS) and platform-as-a-service (PaaS) will be worth about £1.8 billion.