US freezes $42B trade pact with UK over digital tax row

Tech Prosperity Deal paused after London resists pressure on online services levy

The US government has put a proposed $42 billion (£31 billion) trade pact with the UK on ice because the European country has yet to budge on its Digital Services Tax (DST).

In September, the two English-speaking nations agreed the trade pact – with promised investment from Microsoft, Google, and other tech players – in the hope the UK would see a cash injection funding datacenters and other infrastructure.

Under the alliance, the UK and US set up technology sharing agreements in the fields of AI, quantum computing, and nuclear research, Prime Minister Keir Starmer said.

"This Tech Prosperity Deal marks a generational step change in our relationship with the US, shaping the futures of millions of people on both sides of the Atlantic," he said in a statement.

It followed a trade treaty in May – the so-called Economic Prosperity Deal – in which the US wanted to increase food exports to the UK, some of which are currently held back by food safety standards. The US also wanted to see the UK water down online safety rules and DST.

According to a report in the New York Times, US officials have become increasingly frustrated with a lack of progress on both fronts and the Tech Prosperity Deal is now on hold.

A UK spokesperson said both sides agreed to further negotiations in January.

In the Autumn Budget last month, the UK government said it would continue to collect the DST, a 2 percent levy on some of the revenue accrued by search engines, social media, and online marketplaces.

The UK collected just £800 million in Digital Services Tax (DST) from companies such as Amazon, Google, Meta, eBay, and TikTok in the most recent tax year, according to figures released with the Budget. It aims to collect £1.4 billion in 2030-31 and raise £7.3 billion over the next six years.

Some argue this is a trifling sum compared to the revenue generated by Big Tech companies in the UK. Amazon, for example, generated around £29 billion in UK sales for 2024. Google's total UK revenue from search alone is estimated at around £15 billion, gained from its 90 percent share in the search market. Meta's Facebook UK revenue is estimated at around £3.1 billion. It's worth noting that the tax does not apply to all of these companies' UK revenue.

Campaigners TaxWatch argued the DST should be retained and the revenue collected between 2024 and 2029 is equivalent to the cost of training between 108,000 and 128,000 new nurses, or a quarter of the nursing workforce.

Caitlin Boswell, head of advocacy and policy, said: "The UK government should be crystal clear that it won't give tax breaks to Big Tech companies and concede to pressure from Donald Trump. The US President is trying to strong-arm countries into getting his way on taxes and tariffs, but the British public won't have it and neither should the Prime Minister." ®