UK diverted profits tax notification period about to end

Andrew Scott of Pinsent Masons, the law firm behind Out-Law.com, pointed out that these companies were the last to benefit from transitional provisions giving them six months from the end of the financial year to notify HMRC if they were potentially within the scope of the new tax. Once this deadline passes, the notification period will be reduced to three months, he said.

Scott, who was part of the HMRC team which worked on the policy behind DPT before he joined Pinsent Masons, warned previously that companies would have to "consider very carefully" how to engage with HMRC as part of the notification process. Should HMRC consider the company liable for DPT, it would have to pay any tax up front before appealing, he said.

"The policy behind the DPT is that there will be full engagement with HMRC from the start," he said. "Companies need to be ready for that and need to consider, in particular, how to deal with an assertive HMRC."

"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," he said.

DPT applies from 1 April 2015 and is charged at a rate of 25% on 'diverted profits'. It is a new tax, separate from corporation tax, which has its own specific rules for assessment and payment.

Companies do not self assess their liability for DPT. Instead, they must notify HMRC is they are potentially within the scope of the tax and do not satisfy any of the exemptions. Usually, this notification must be given within three months after the end of the company's accounting period, but this has been extended to six months for accounting periods ending on or before 31 March 2016. This means that companies with a 31 March year end have until 30 September to notify.

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 are taken out of a 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.

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. HMRC has only two years from the end of the accounting period to issue a notice if the company makes a notification, or an extended four-year period if the company does not notify.

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