Budget 2015: diverted profits tax "being pushed through" with "no time for meaningful debate", says expert

Self was commenting following the UK chancellor of the exchequer's announcement in his Budget statement that the new diverted profits tax will come into force on 1 April 2015 and will be contained in the Finance Bill to be published next week. The chancellor said that some changes would be made to the draft legislation published in December.

Diverted profits tax (DPT) is a new tax which was announced in the chancellor's Autumn Statement on 3 December last year and draft legislation was published for consultation on 10 December. The new 25% tax will apply where a foreign company "exploits the permanent establishment rules" or where a UK company or a foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that "lack economic substance".

The draft legislation published in December stated that affected companies would have to notify HMRC within three months of the end of an accounting period in which it was "reasonable to assume" that diverted profits might arise. According to the Budget document the legislation has been revised to narrow the notification requirement. According to the Budget document, "there have also been changes to clarify rules for giving credit for tax paid, the operation of the conditions under which a charge can arise, specific exclusions and the application of DPT to companies subject to the oil and gas regime". However the revised draft legislation has not yet been published.   

Self said: "Further changes have been announced today, but we have not yet seen the detail – this is not the best way to make complicated law work properly. Legislate in haste, repent at leisure?"

The chancellor also confirmed that, as announced in the Autumn Statement, legislation will be introduced in the Finance Bill to restrict the proportion of banks' annual taxable profit that can be offset by carried forward losses to 50%. However, it was announced that, the government has decided to include an allowance of £25 million of losses before the restriction applies for groups headed by a building society.

It was also announced that there will be a consultation on making customer compensation expenses non-deductible for corporation tax purposes, in an extension to the existing principle that fines are not generally tax-deductible.  

A new measure was announced in the Budget to prevent companies from "obtaining a tax advantage by entering contrived arrangements to convert brought forward reliefs into more versatile in year deductions". This will have immediate effect from 18 March.

A technical note issued by HMRC explains that where companies find they have carried-forward losses that they cannot use imminently because they are loss making but other group companies are profit making, some companies will enter arrangements to access those losses by shifting profits around the group, or changing the timing of receipts. The note states that "this may involve as simple an arrangement as shifting a profitable trade or income producing asset into the company with carried-forward relief." It states that this type of arrangement will not be affected by the new restriction but companies that "go further, and ensure that they also create a new in-year relief somewhere in the group where this would be of use, effectively turning the carried-forward loss into a new and more versatile in-year relief; ‘refreshing’ the loss" will be affected by the new measure but only when it is reasonable to assume that the value of the tax advantage will exceed any other economic benefits referable to the arrangements.

Pinsent Masons tax expert Eloise Walker expressed concern at how this new restriction would apply. She said: "I just don’t know how they are going to apply it – how will they do the hypothetical 'it will be reasonable to assume' test of the economic benefit versus the tax value? Why not make it objective?"

"I would have expected HMRC to hit any schemes that try to get round the carry-forward rules by using the GAAR – or one of the innumerable TAARS we already have must surely apply here. Between this and the diverted profits tax, it’s legislators gone mad," she said.

Banks and insurers with branches both within and outside the UK may be affected by a restriction to VAT recovery which will apply from 1 August 2015. This will mean that supplies made by foreign branches can no longer be taken into account when calculating how much VAT incurred on overhead cost can be deducted. It implements a 2013 decision of the Court of Justice of the European Union involving Credit Lyonnais.

In another measure impacting banks, it was announced that the bank levy will be increased to 0.21 % from 1 April 2015.

The chancellor announced measures to benefit the UK's oil and gas industry. These include the announcement that the investment allowance mentioned in the Autumn Statement will remove 62.5% of investment from the supplementary charge and confirmation that a cluster area allowance will be introduced. The chancellor also announced a reduction in the supplementary charge from 32% to 20% to be backdated to 1 January 2015 and a reduction in the rate of petroleum revenue tax from 50% to 35% for chargeable periods ending after 31 December 2015.

Heather Self said: "The chancellor is essentially getting money in from the banks, and paying it out to the oil companies". 

The Finance Bill will be published on 24 March and debated in the UK parliament on 25 March. It needs to be enacted before parliament is dissolved on 30 March. It is expected that there will be another Finance Bill after the general election.