If it wasn’t cold enough in the UK, the US has now decided to freeze their £31 billion tech deal.
The US move deals a significant blow to UK government hopes of deepening economic ties with Washington and raising fresh questions about the state of the so-called special relationship.
The “tech prosperity deal”, announced last year and presented as a centerpiece of renewed US-UK cooperation, has been put on hold amid unresolved trade disputes. The move underscores how disagreements over taxation, regulation, and market access continue to complicate relations, despite high-profile diplomatic engagement between London and Washington.
A flagship agreement put on ice
The prosperity deal was unveiled during Donald Trump’s state visit to the UK and was described by the prime minister, Keir Starmer, as “a generational stepchange in our relationship with the US”. It was designed to unlock billions of pounds of American investment into the British technology sector, reinforcing the UK’s ambitions to become a global hub for AI and advanced digital industries.
Under the agreement, US tech giants pledged major spending commitments, including £22 billion from Microsoft and £5 billion from Google. These investments were expected to support infrastructure, research, and jobs across the country. However, Washington has now paused implementation, citing insufficient progress by the UK in lowering trade barriers in other areas of the bilateral relationship.
The development was first reported by the New York Times, which said the Trump administration was unhappy about the UK’s continued use of a digital services tax and its restrictive food safety rules.
US pressure over tax and regulation
At the center of the dispute is the UK’s digital services tax, a 2% levy on the revenues of large technology companies such as Amazon, Google, and Apple. The tax raises around £800 million a year and has long been a source of friction with Washington, which argues that it unfairly targets American firms.
Trump has repeatedly threatened retaliatory measures against countries that impose digital taxes on US companies, and the UK has faced sustained pressure to scrap or amend the levy. Starmer has so far resisted those demands, arguing that the tax is necessary to ensure tech companies pay a fair share.
The Guardian previously reported that the government had explored proposals to reduce the amount paid by US firms by widening the scope of the tax while keeping overall revenues unchanged. However, no changes have yet been made.
The US has also raised concerns about the UK’s online safety rules, with American officials signalling that their enforcement could affect trade discussions. While UK ministers have promised to review aspects of the regime, it remains another area of tension in the negotiations.
UK officials downplay the setback
Despite the pause, British officials have sought to play down the significance of the decision. One government source described it as “the usual bit of hardball negotiations by the Americans”, drawing parallels with previous talks over pharmaceutical exports that stalled before eventually reaching agreement.
“[The US commerce secretary] Howard Lutnick is a tough guy. We understand that the Americans negotiate incredibly hard but we’ll stand our ground. They want what’s best for their country, we want what’s best for ours,” the source said.
A second official said the pause was simply “part of the shape of the negotiations” and emphasised that discussions were ongoing.
High stakes for regional growth and jobs
The delay is particularly damaging for regional development plans tied to the deal. A central element of the agreement was the creation of an AI “growth zone” in the north-east of England, which officials said could attract up to £30 billion in investment and create 5,000 jobs.
The text of the agreement itself warned that it would only “becomes operative alongside substantive progress being made to formalise and implement” its provisions, giving Washington leverage to slow or halt progress if talks faltered.
Diplomacy under strain
The pause comes after a year of intensive UK diplomatic efforts to avoid punitive US tariffs and secure closer economic ties. As part of that push, Starmer hosted Trump for a second state visit at Windsor Castle in September, an unprecedented gesture for a US president.
At the time, Starmer said the deal had “the power to change lives” and would “renewed the special relationship for a new era”. “This is the territory on which the future will be won,” he said, arguing that collaboration on AI and emerging technologies would “strengthen democracy not tyranny”.
Trump, for his part, said the agreement would help both countries “dominate” the AI sector and “ensure our countries lead the next great technological revolution side by side”.
Next steps in Washington
Peter Kyle, the business and trade secretary, was in the US last week for talks with Lutnick, the US trade representative Jamieson Greer, and the US treasury secretary, Scott Bessent. Discussions covered whisky and steel tariffs as well as cooperation on critical minerals, with further talks expected in January.
A UK government spokesperson said: “Our special relationship with the US remains strong and the UK is firmly committed to ensuring the tech prosperity deal delivers opportunity for hard-working people in both countries.”
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