The UK government has announced plans for a two per cent digital services tax on the revenues of global tech giants, aimed at raising £400 million a year.

Setting out his 2018 Budget, the chancellor Philip Hammond announced that a narrowly targeted group of “established tech giants” will be taxed in the UK from 2020 to ensure that multi-billion dollar companies pay their “fair share”.

The levy, which is expected to fall on social media giants like Facebook, technology firm Apple and search engine Google, has been rumoured since Hammond floated the idea of an ‘Amazon tax’ to target the UK profits of the US e-commerce giant.

Digital platforms targeted by the tax are those that make £500 million in worldwide revenues annually, and the chancellor was at pains to point out that profitable big tech companies - and not tech startups - would see their tax status change.

"This will be a narrowly targeted tax of UK revenues of specific business models, designed for established technology giants rather than startups to shoulder the burden," he said.

Hammond also emphasised that the new tax would not be applied to online sales of goods and services, as this would be unfairly passed on to the consumer, but to the turnover made on these sales from UK customers.

Addressing MPs in the UK parliament, he said: “The rules of the game must evolve now if they are to keep up with the digital economy.

“Digital platforms delivering search engines, social media and online marketplaces have changed our lives, our society and our economy, mostly for the better. They also pose a real challenge for the sustainability and fairness for our tax system.”

Facebook has been criticised for paying £15.7 million of UK corporation tax, despite revenues of £1.2 billion reported last year. Amazon’s UK division paid £1.7 million in taxes last year, despite profits trebling to £72.3 million.

The chancellor said that the government has been working with the OECD and the European Commission to reach an international agreement on a digital tax for large tech companies. But he explained that progress towards consensus had been “painfully slow” and that we “cannot talk forever so we will now introduce a UK digital services tax”.

"It is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here," he said, adding that a UK digital services tax would be consulted on whilst international agreement was sought.

If a global alternative is found, the government may choose to adopt the international agreement instead of the UK-only digital services tax, Hammond added.

The announcement of a digital services tax has received a cautious welcome from industry leaders and consumers, who have long railed against the low tax revenue generated by some of the world’s most valuable companies’ UK operations.

Charlotte Crosswell, chief executive of Innovate Finance, said: “We are encouraged that the digital tax announced today will target larger companies, already successful at scale, allowing start-ups to continue to enjoy the impressive growth they have seen so far and to provide increased competition through disruption of more traditional sectors.”

She also welcomed an additional move to extend the government’s FinTech Challenge, with an extra £2 million allocated to the Affordable Credit Fund, an initiative which supports FinTech firms to provide innovative technological solutions to social and community lenders.

However, many commented that the government's expected tax receipts of £400 million per year from the levy would be a drop in the ocean relative to the profits made by tech giants.

Labour Party leader Jeremy Corbyn labelled the measure "too little, too late".

Meanwhile Carolyn Fairbairn, director general of the Chamber of British Industry, said response to the tax had been “mixed”. She warned that going ahead with a digital services tax without securing international cross-border co-operation could put the UK economy at a competitive disadvantage.

“Going it alone on a digital services tax is high risk” said Fairbairn. “All businesses should be at the cutting-edge of digital technology. If the UK is to break ranks with the international community, any new approach must be carefully built on evidence from a wide range of enterprises of all sizes.”

Leon Deakin, a partner in tech law at London-based firm Coffin Mew, commented: “Announcing a crackdown on tax avoidance and evasion by the tech giants will certainly play well to the public gallery. Following the recent data breaches and revelations about how data is handled the public mood is clearly to try and bring them down a peg or two.”

However he warned that for sector specialists and those working with tech startups and businesses looking to scale-up, the devil will inevitably be in the detail as to how the system will be designed to ensure the burden is shouldered by the giants.

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