Diverted profits tax revenues exceed Treasury estimates

The £388 million collected from DPT in 2017/18 exceeds the £360 million that the Exchequer forecasted would be the impact of DPT. Each year so far the Treasury's estimates for DPT revenues have been exceeded.

“Businesses will be concerned that diverted profits tax is having a significantly greater impact than anticipated,” said Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

The figures show that just 22 businesses received charging notices from HMRC in 2017/18. Hyde said this "highlights the large size of many of the payments made".

“HMRC clearly has the UK’s biggest businesses in its sights, and the DPT is having a bigger financial impact than expected when the rules were introduced,” he said.

DPT was introduced in 2015 and is designed to deter activities that divert profits away from the UK so that they are not subject to corporation tax. A DPT investigation can be settled by adjusting transfer pricing so more UK corporation tax is paid. DPT is paid at 25%, whereas corporation tax is only payable at 19%. 

Companies are required to notify HMRC if they may be within the scope of DPT. The figures show an increase in companies making DPT notifications from 145 in 2016/17 to 220 in 2017/18. 

"It is unlikely that there has been an increase in companies using structures potentially caught by DPT, so the increase in companies making DPT notifications suggests that companies are now taking a more cautious line in notifying potential liabilities, even for structures they may not have originally notified for earlier years," Hyde said.

The amount of tax collected through transfer pricing disputes also increased in 2017/18, by 4% to £1.7 billion, up from £1.6 billion in 2016/17, according to the figures.

They show that HMRC is increasingly taking longer to resolve transfer pricing disputes. The average time taken is now longer than two and a half years (30.4 months), up 11% in just a year from 27.3 months. However, there is an increase in the percentage of disputes being settled earlier, with 50% of disputes now being settled within 20.6 months, in contrast to 29.4 months in 2016/17.

"Many of the transfer pricing disputes being settled quickly are likely to be those where a DPT charging notice has also been issued," Hyde said "Faced with the risk of DPT at 25%, groups are keen to take a transfer pricing adjustment to settle for tax at 19% and to do so groups have to settle within the 12 month review period."

Transfer pricing refers to the necessary charges made between different parts of a multinational business for goods, services or intangible assets, including intellectual property. Tax rules provide that transactions between connected parties should be taxed as if they were on arm's length terms. 

In recent years, multinationals have been accused of arranging their transfer pricing to minimise their tax liabilities in jurisdictions such as the UK.

“Transfer pricing disputes are often incredibly complex, but the significant length of the time taken by HMRC to resolve them can create a lot of uncertainty for businesses,” Hyde said. 

The number of advance thin capitalisation agreements being agreed has more than halved since 2015/16, with 164 agreed in 2015/16 and just 79 agreed in 2017/18. 

An advance thin capitalisation agreement (ATCA) is an agreement between a business and HMRC which sets out how the transfer pricing rules apply to funding issues, including the appropriate levels, terms and conditions of debt financing between connected parties, so that the UK receives the right amount of tax at the right time.

"The huge fall in ATCAs agreed by HMRC in 2017/18 is likely to be as a result of the introduction of the corporate interest restriction in April 2017, but reduces certainty for businesses," said Hyde.