Diverted profits tax will have 'wide scope', expert says

Multinational companies approached by HMRC as being potentially liable for the new tax should be prepared to present their case fully, given the considerable resources that the tax authority had at its disposal, according to tax expert Andrew Scott of Pinsent Masons, the law firm behind Out-Law.com.

Almost 100 multinationals have been identified as potentially within the scope of the new tax, and HMRC is expecting many of them to dispute the charge, director-general of business tax Jim Harra told the Financial Times this week. Many of those companies had been "taken by surprise" by the scope of the tax, he said.

This week, Bloomberg BNA reported that HMRC had issued its first DPT charging notice to a multinational company. The charge, which applies to profits that HMRC believes have been artificially diverted away from the UK, has been raised in respect of a royalty payment for offshore intellectual property, according to the report.

"It is very interesting to see the view from the top at HMRC on the application of the diverted profits tax," said Andrew Scott.

"It is clear that the scope of the tax is wide and it is also clear that the resources given to HMRC to assess DPT issues are being effectively deployed. This is bound to result in HMRC seeking to explore in depth with taxpayers whether a DPT charging notice should be issued. As the tests rely so heavily on questions of fact, it is vital that taxpayers engage in full fact-finding and present the evidence to HMRC in as cogent a way as possible to support their arguments," he said.

DPT applies from 1 April 2015 and is charged on diverted profits at a rate of 25%; 5% higher than the corporation tax rate. However it is a new tax, separate from the corporation tax regime, and has its own specific rules for assessment and payment.

Companies do not self-assess their liability for DPT and instead must notify HMRC if they are potentially within the scope of the tax and are not subject to any of the exemptions. If, following notification, HMRC considers that a company may be liable it will issue a 'preliminary notice' setting out the grounds on which it considers that DPT is payable and calculating the tax based on certain simplified assumptions.

On receipt of a preliminary notice, the company will be given the opportunity to correct any obvious errors. HMRC can then issue a 'charging notice' if it still believes DPT is due, which the company will then have 30 days to pay. HMRC then has 12 months to review the charge to DPT and reduce or increase it if necessary; however, the company will only be able to appeal the DPT charge once this 12 month review period has passed.

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

The second situation in which 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 PE in the UK. Where this is the case, DPT will apply where either the main purpose of the arrangements put in place is to avoid UK tax, or a tax mismatch results in the total tax take from UK activities being significantly reduced.