Big US technology companies have been offered a significant tax cut by Keir Starmer in return for lower tariffs from Donald Trump’s administration as the UK braces itself for a global trade war.
The Guardian understands the UK government is willing to reduce the headline rate of its digital services tax (DST) in an attempt to placate the US president, while at the same time applying the levy to companies from other countries.
The move, which would represent a significant concession to US tech firms, comes after the prime minister decided not to ditch the tax entirely as it currently raises £800m a year and government finances are already stretched.
When he addresses the nation on what the White House is calling “Liberation Day”, Trump is expected to slap tariffs on imports from scores of rival economies – though it remains unclear whether these will be uniform, or vary by country.
Leading economies including the EU are then expected to retaliate with their own tariffs – while simultaneously negotiating in the hope of winning exemptions. The UK has not so far threatened to hit back, though Starmer has said he is “keeping all options on the table”.
Downing Street sources confirmed the UK had now reached broad agreement with US counterparts on a trade deal, focusing on technology, which it hopes will help the UK secure a carve-out from tariffs. Talks between officials will continue.
The UK’s trade deal offer is understood to include a proposal to broaden the DST to bring smaller companies within scope, meaning they would contribute to a tax take which is forecast to increase to £1.2bn a year by the end of the decade.
As a result the 2% levy on the UK revenues of the big US tech companies could fall. Five have publicly said they pay the tax – Amazon, Meta, Alphabet, eBay and Apple – and some have lobbied the government to pay less, arguing that it discriminates against larger firms and should apply to profits rather than revenues.
Tax experts say that Elon Musk’s X is also likely to have paid the tax in recent years but the company has not said so publicly. Tech businesses that generate more than £500m in worldwide revenues and more than £25m from UK users are liable.
Government sources suggested that broadening the scope of the tax would mean some tech firms from other countries would now be expected to pay, helping to address the fairness argument made by the White House.
Trump has complained about the impact that DSTs around the world are having on US firms. In February he issued an executive order – entitled “Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties” – threatening tariffs in retaliation.
No 10 remains confident it can secure exemptions once a trade deal is signed, but believes that Trump’s focus on a “big bang” of announcements means the UK should initially brace itself for 20% tariffs on all goods entering the US.
The business secretary, Jonathan Reynolds, said the UK was in “the best possible position of any country to reach an agreement” on duties getting lifted, while officials cited the US president’s pledge to “be nice” to countries that had balanced trade with the US.
The UK is also understood to have made concessions on agriculture, with tariffs on imports of US beef, chicken and other meat to the UK to be lowered. The move is likely to further infuriate farmers, who have already attacked the government over its changes to inheritance tax rules for agriculture.
However, sources said that animal welfare and hygiene standards were “an absolute red line”, meaning the ban on importing hormone-treated beef and chlorine-washed chicken will remain in place.
As ministers braced themselves for the impact of Trump’s trade war, however, economists warned that the UK economy is likely to be hit, even if it dodges direct tariffs.
John Springford, of the Centre for European Reform, said: “At a minimum, Trump’s trade wars make it even more likely that further spending cuts or tax rises are coming in the autumn budget – we just don’t know how much at this stage.”
He added that even if the UK is not hit with tariffs, “the far bigger costs would arise from an escalating global trade war, even if a deal is done or the UK does not retaliate. Higher trade barriers would hurt demand in the EU and the US, with knock-on effects for British exports.”
Analysts at Goldman Sachs revised down their forecast for the UK economy this year from 0.9% to 0.8% on Tuesday, warning of the spillovers from wider trade tensions, even if Reynolds succeeds in having direct tariffs lifted.
Emily Fry, a senior economist at the Resolution Foundation, said: “Even if the UK’s sensible strategy of avoiding tit-for-tat tariffs pays off, as a small, open economy it won’t be immune to the impacts of supply chain disruptions and global growth headwinds as a result of US tariffs and possible retaliation.”
When the Office for Budget Responsibility delivered its forecasts alongside Rachel Reeves’s spring statement last week, it warned that a tit-for-tat trade war could upend its projections.
The OBR committee member David Miles underscored that prediction on Tuesday, stressing that 20-25% tariffs on the UK, maintained for five years, would eliminate the £10bn of headroom the chancellor left herself against her self-imposed fiscal rules – though he stressed that this would be “in some ways a very extreme assumption”.
Government insiders rejected suggestions that any economic deal would be contingent on the UK’s approach to free speech, saying they were “completely unlinked”. Reynolds said the issue had “not been a material factor” in the trade negotiations.
