Britain's ad bodies have warned that the government's proposed digital services tax targeting tech giants such as Facebook, Google and Twitter could threaten the UK's position as "a leader in digital innovation" and pose a challenge to a digital ad market that's already "facing an uncertain economic and regulatory climate".

While ISBA, the UK Internet Advertising Bureau and the Advertising Association cautiously welcomed the content of chancellor of the exchequer Philip Hammond's Budget 2018, they sounded a note of caution around plans to introduce a digital services tax.

From 2020, tech giants will have to pay tax on the sales they generate in the UK. The proposed legislation will only affect "established tech giants", such as the likes of Facebook, Google, Amazon and Twitter, rather than start-ups, Hammond promised. The idea is to prevent tech companies from negotiating the gaps between international tax laws by shifting sales and profits between jurisdictions.

But the IAB said that the tax could present a "disincentive for competitors to set up and grow in the UK", while ISBA said it was "vital that the UK does not lose its position as a leader in digital innovation".

"The strength of our digital economy is based on the UK being a welcoming environment for digital businesses of all sizes," Phil Smith, director-general of ISBA, said.

"ISBA recognises the need to update international tax treaties and domestic tax legislation to reflect the needs of modern business. We welcome the work of both the EU and OECD in driving for a multinational approach and note their belief that it would be inappropriate to seek to treat digital businesses differently from businesses in other sectors.

"It is essential that the UK delivers a rounded, modern and attractive tax regime. ISBA await more detail as to the consultation, but would urge government to proceed on a multilateral basis, in an evidence-led fashion."

Hammond has previously mooted the idea of a digital services tax. At the Conservative conference in September, he said that "the best way to tax international companies is through international agreements, but the time for talking is coming to an end and the stalling has to stop".

"If we cannot reach agreement, the UK will go it alone with a digital services tax of its own," Hammond added.

But for Jon Mew, chief executive of IAB, such a tax poses "a significant challenge to the UK digital advertising market at a time when it is already facing an uncertain economic and regulatory climate".

He added: "It might create a disincentive for competitors to set up and grow in the UK and may also impact on mid-market players who drive competition and provide choice.

"The commitment of an extra £500m for Brexit preparations is good news but, above all, we need clarity as there are still a lot of unanswered questions around talent and data flows. We sincerely hope the government is indeed committed to leading the world in innovation-friendly regulation that supports the growth of the tech sector."

Meanwhile, the AA broadly welcomed the Budget, "with its emphasis on growing productivity" and preparing the UK for Brexit.

However, Stephen Woodford, the AA's chief executive, added: "We also note the chancellor’s desire to see international agreement on taxing the global tech platforms, as action in this area will be much more effective with cross-border co-operation.

"Mr Hammond’s commitment to introduce a UK-only tax – to be implemented if international agreement is not forthcoming by 2020 – will need to ensure in its detail that Britain remains attractive to international tech investment, especially at a time of great change for the UK’s relationship with the EU and the wider world."

The ad industry's reaction echoes that of the Confederation of British Industry, which has likewise warned that tax changes should not damage the UK's global competitiveness.