Out-Law News 4 min. read

Diverted profits tax: Notification improved but still concerns for real estate, said expert


Changes to the notification requirements for diverted profits tax (DPT) are welcome, but there are still concerns about real estate transactions and a "nasty sting in the tail" for oil and gas companies, said Heather Self , a tax expert at Pinsent Masons, the law firm behind Out-law.com. She was commenting on a note issued by HM Revenue & Customs (HMRC) to advisers summarising the amendments to be made to the DPT draft legislation. 

Diverted profits tax (DPT) is a new UK tax "aimed at large multinationals who artificially shift their profits offshore". It was announced in the Chancellor of the Exchequer's Autumn Statement on 3 December 2014 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". In the Budget, the Chancellor confirmed that DPT will come into force on 1 April 2015, as originally planned.

Under the regime, companies will be required to notify HMRC that they may be affected by DPT. If HMRC thinks there may be a DPT liability it will issue a preliminary notice, against which the company can make representations only on limited grounds. A formal notice will then be issued, and over a 12 month review period detailed discussions can be held; but, in the meantime, the tax has to be paid.

HMRC said the revised draft legislation "narrows" the requirement for companies to notify that they are affected by the regime. In the original draft legislation affected companies were obliged 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. Heather Self said that there were concerns that this was so wide it would lead to huge numbers of notifications in situations where a liability to DPT was extremely unlikely to arise.

HMRC said that the notification requirement will only now apply "where there is a significant risk that a charge to DPT will arise and where HMRC does not know about the arrangements". It states that the emphasis will be changed so that notification will not be required if it is reasonable for the company to assume that a charge to taxable diverted profits tax will not arise. According to HMRC's note, there will be no duty to notify for any accounting period "if  it is reasonable for the company to conclude that it has supplied sufficient information to enable HMRC to decide whether to give a preliminary notice for that period and that HMRC has examined that information (whether as part of an enquiry into a return or otherwise); or HMRC has confirmed that there is no duty to notify because the company or a connected company has supplied such information and HMRC has examined it".

"The notification requirements look to be much improved and this will reassure many companies who were concerned about the administrative burden of having to make annual notifications in situations where no charge to DPT would arise," said Heather Self.

In addition, to avoid the need for annual notifications, HMRC said that once a company has notified for one period then it does not have to notify for the next provided that there has been no material change in circumstance. According to the note, the period allowed for initial notification when the tax comes into force has been extended from three months to six months after the end of the relevant accounting period. This means that a company with a 31 December 2015 year end will not have to notify until 30 June 2016.

HMRC says that the legislation will also be changed to "put beyond doubt that it may apply to sales of property in the same way as to other goods and services". Pinsent Masons real estate tax expert John Christian raised concerns last month about the impact of the tax on real estate transactions.

John Christian explained that DPT could apply in some circumstances where a non UK resident company, such as an offshore special purpose vehicle (SPV), has been used in a transaction involving UK land or where there is a UK presence and profits are extracted to offshore owners based in low tax jurisdictions.

Christian said: "Although we won’t know definitely until we see the Finance Bill next week, it appears from HMRC's note as if DPT could still impact significantly on real estate transactions".

He warned that development projects involving offshore owned UK property should be reviewed in the light of DPT, as should investment structures involving an offshore company where the local tax rate is less than 16% and propco/opco structures.

A propco/opco structure involves one company owning all the group's land (propco), which is separate from the operating companies (opcos) which are trading and lease the premises from the propco. This enables the group to raise finance with the interest funded from the intra group income stream from the properties.

HMRC's note states that a 25% rate of tax would not be a significant deterrent for oil and gas companies, which pay corporation tax at higher rates. The oil and gas 'ring fence regime' operates at a basic rate of 30%, with a supplementary charge of a further 20%. The DPT rate will be set at 55% for oil and gas companies.

Heather Self said: "Following a Budget with hand-outs for oil and gas companies, this 55% rate is a nasty sting in the tail."

Other changes to be made to the draft legislation include provisions to exclude charities and tax exempt bodies from the “tax mismatch" provision and changes to the way DPT is calculated.

In his Budget, the Chancellor announced that diverted profits tax will be in the pre-election Finance Bill which is due to be published on 24 March, debated in Parliament on 25 March and enacted before Parliament is dissolved on 30 March.

"I am extremely concerned that this highly complex legislation is being enacted in such a hurry with very little time available for proper scrutiny of the final provisions. With a projected yield in 2015/16 of only £25m, it is hard to see why this measure could not be properly debated as part of a second Finance Bill, later in the year.” said Heather Self.

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