Liberal Democrat leader Sir Ed Davey has warned against what he calls “appeasement” of Donald Trump, amid reports that the Labour government may reconsider or even scrap the UK’s digital services tax to avoid potential US tariffs.
Chancellor Rachel Reeves did not deny that the measure was under discussion, following reports that the UK is in talks with the US regarding the tax in an attempt to secure an exemption from reciprocal tariffs. The US President has announced sweeping tariff increases on trade partners, set to take effect from April 2.
Sir Ed criticised the government’s approach, arguing that Labour’s strategy was to “be nice” to Trump in the hope of avoiding economic retaliation. Speaking at the Liberal Democrat spring conference in Harrogate, he said:
“Now Labour’s even talking about scrapping Britain’s tax on social media giants. Changing the UK’s tax policy to appease Donald Trump and Elon Musk. Well, appeasement never works with bullies, and it doesn’t work with Trump. And you can see that he’s already put his tariffs on British steel.”
Discussions in Washington
Business Secretary Jonathan Reynolds has been holding talks with trade counterparts in Washington this week, while Technology Secretary Peter Kyle has been in the US to promote the UK as a hub for artificial intelligence investment, including a speech at Nvidia’s annual conference.
Ms Reeves, speaking on the BBC’s Sunday with Laura Kuenssberg, confirmed that discussions were ongoing across a range of issues concerning US tariffs. When asked about whether changes to the digital services tax were being considered, she said:
“We will continue to operate on that principle that you should pay taxes in the country in which you operate.”
Pressed further on whether she might modify the tax to shield the UK economy from Trump’s tariffs, Ms Reeves responded:
“You’ve got to get the balance right, and those discussions at the moment are ongoing. We want to make progress. We do not want to see British exporters subject to higher tariffs, and we want to see trade barriers fall right across the world.”
UK Ambassador to the US Lord Mandelson told the Financial Times that “the tax itself is under discussion,” signalling that several options are being considered, not just a complete abolition. Reports suggest the Treasury is weighing potential changes, depending on whether Washington offers a clear exemption for Britain from the incoming tariffs.
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Retaliatory tariffs on Tesla?
Sir Ed has urged Prime Minister Sir Keir Starmer to stand firm against Trump’s economic aggression and to coordinate a response with the European Union and Canada. He called for retaliatory tariffs on American goods, including electric vehicles manufactured by Tesla.
“Let’s stand side by side with the EU and with our Commonwealth ally Canada,” Davey said. “I urge the Prime Minister to bring those leaders together here in the United Kingdom to agree a co-ordinated response to Trump’s trade war – just like the Prime Minister’s rightly done on Putin’s murderous war.”
Sir Ed emphasised that if Trump presses ahead with his trade policies, the UK should respond in kind.
“As others have done, we should hit back with tariffs of our own, starting with those Teslas Trump is so desperate to sell.”
The digital services tax, introduced in 2020, was designed to ensure that large tech companies, including US giants like Amazon, Google, and Facebook, contribute their fair share to the UK economy. The tax imposes a 2% levy on revenues earned from UK-based users, rather than profits, which can often be shifted to lower-tax jurisdictions.
Labour’s balancing act
The Labour government now faces a difficult decision—whether to maintain the tax and risk economic retaliation from Trump’s America or adjust it to safeguard British businesses from punitive tariffs. Ms Reeves has indicated that negotiations are ongoing, but there is no certainty yet on what adjustments, if any, will be made.
Critics argue that abandoning the tax under US pressure would set a dangerous precedent, signalling that UK economic policy is susceptible to foreign influence. However, others believe that adapting the tax could prevent unnecessary harm to British exporters, particularly in industries like steel, which has already been targeted by Trump’s trade measures.
As discussions continue in Washington and London, the UK government must decide how to navigate this latest challenge in transatlantic relations—whether to stand firm on tax policy or compromise to avoid a trade war.
