Companies need to be ready to engage with HMRC as DPT notification deadline approaches, says expert

Companies need to "consider very carefully" how to engage with HM Revenue and Customs (HMRC) about the UK's new diverted profits tax (DPT), according to Andrew Scott, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

As a new tax, separate from corporation tax, DPT has its own specific rules for assessment and payment. It is not self-assessed, but companies have to notify HMRC if they are potentially within the scope of DPT.

A company must usually give this notification within 3 months after the end of its accounting period. However, for accounting periods ending on or before 31 March 2016, this three month period is extended to six months. This means that companies with a 31 December year end, have until 30 June to notify.

"Any company that thinks it may have to notify a potential liability will also need to consider very carefully how to engage with HMRC whilst they consider whether to issue a notice. A taxpayer will have only a relatively limited amount of time to put its case, and, if HMRC issue a notice, the company will have to pay the tax up-front. It will then have to wait a year before it can appeal and get back any tax that is ultimately found not to be due," said Andrew Scott.

Following notification, if HMRC considers that a company may be liable for DPT, it will issue a 'preliminary notice', outlining the grounds on which it considers that DPT is payable and calculating the tax based on certain simplified assumptions. If a company notifies its potential liability then HMRC has only two years from the end of the accounting period to issue a notice, whereas there is an extended four year period if the company does not notify.

If it receives a preliminary notice a company has an opportunity to correct any obvious errors in the notice, following which  HMRC will issue a 'charging notice' if it still believes DPT is due and the company has 30 days to pay the tax.

"The policy behind the DPT is that there will be full engagement with HMRC from the start. Companies need to be ready for that and need to consider, in particular, how to deal with an assertive HMRC," Andrew Scott said. Before he joined Pinsent Masons, in his former role at HMRC, Scott worked on the policy behind DPT.

Once the charging notice has been issue, HMRC then has 12 months to review the charge to DPT, during which time the charge may be reduced or increased. However, the company can only appeal a DPT charge after the end of the review period.

"The fact that there is no right of appeal until 12 months after payment of any DPT will mean that companies that are ultimately successful on appeal will suffer a significant cash flow disadvantage," Scott said.

DPT applies from 1 April 2015 and is charged at a rate of 25% on 'diverted profits'.

Broadly, DPT applies in two circumstances. The first situation is where there is a group with a UK subsidiary or permanent establishment (PE) and there are arrangements between connected parties, which "lack economic substance" in order to exploit tax mismatches. One example of this would be if profits are taken out of a UK subsidiary by way of a large tax deductible payment to an associated entity in a tax haven.

The second situation where DPT can apply is where a non-UK resident trading company carries on activity in the UK in connection with supplies of goods, services, or other property and that activity is designed to ensure that the non-UK company does not create a permanent establishment in the UK, and either the main purpose of the arrangements put in place is to avoid UK tax, or a tax mismatch is secured such that the total derived from UK activities is significantly reduced.

The rate of UK corporation tax is currently 20%, considerably lower than DPT at 25%, so it is expected that companies affected by DPT will seek to restructure their operations to pay more corporation tax, rather than being liable for DPT.