Diverted Profits Tax Notifications

Fri 27 May 2016

Outline

DPT applies to profits arising on or after 1 April 2015. However, although it is prospective in that the tax only applies from 1 April 2015, it applies to pre-existing structures.

DPT is charged at 25% of profits determined by DPT legislation as having been “diverted” from the UK.  The two heads of charge triggering a DPT charge are broadly – 

• intra-group charges or income transfers that do not have economic substance producing a benefit as a result of a tax mismatch; and 
• a non-resident company carrying on activity in the UK in connection with the supply of goods, services or other property but where that activity is designed to avoid creating a UK permanent establishment (“UKPE”).   

Deadline for notification requirement

DPT is not self -assessed; it is assessed by HMRC issuing a charging notice.  Nevertheless, there is a requirement for companies to notify HMRC if they are potentially within the scope of DPT.   

Normally, notification has to be made within three months of the end of the accounting period (AP).  However, a relaxation was made so this is extended to six months after the end of the AP for the first accounting period ending on or before 31 March 2016.  Therefore, for calendar year-end companies, the first notification will potentially need to be made by 30 June 2016.

Determining whether notification is needed

In determining whether notification has to be made, certain modifications are made to the heads of charge to make them somewhat simpler.  These modifications only apply for the purposes of the notification requirement.

Avoidance of UK permanent establishment

• Ignore whether the arrangements are designed to avoid a UK PE and instead look only at whether the foreign company is not carrying on a trade in the UK for CT purposes;
• Where the tax avoidance condition applies  – instead of looking at whether a main purpose of the arrangements was to reduce CT, test whether there are arrangements which result in an overall reduction in tax (both UK and foreign) in respect of the activities carried on in the UK. 
• The insufficient economic substance condition is disapplied – but where there is a tax mismatch outcome instead the test is simply whether the financial benefit of the tax reduction is ‘significant’ relative to the non-tax benefits.  

Insufficient economic substance 

• As with the avoided PE, the insufficient economic substance condition is disapplied – but where there is a tax mismatch outcome, instead the test is simply whether the financial benefit of the tax reduction is ‘significant’ relative to the non-tax benefits.  

How to notify HMRC

Notifications should be made by email to the DPT mailbox divertedprofits.notification@hmrc.gsi.gov.uk. Companies which prefer not to use email may instead send their notification to Diverted Profits Tax Unit, Large Business, S0791, Newcastle, NE98 1ZZ.  In addition, the company should inform their usual HMRC contact that notification has been made.  There is a standard HMRC template for making notifications under DPT in the Appendix to HMRC’s DPT guidance issued 30 November 2015.

The notification must state which section of the legislation (section 80, section 81 or section 86) applies and must specify the following:

• Where the company is potentially within the scope of the DPT because it is a company resident in the UK that enters into a transaction where either the transaction or an entity which is party to the transaction lacks economic substance and that results in a tax mismatch, or it is a non-UK company which has a UK-taxable presence (a permanent establishment) and enters into a transaction or entities where either the transaction or an entity which is party to the transaction lacks economic substance and that results in a tax mismatch:
  • The nature of the material provision; and
  • The identity of the other person (“P”) that is party to the material provision.  
• Where the company is potentially within the scope of DPT because it is a non-UK company which has avoided creating a UK taxable presence:
  • The identity of the person carrying on activity in the UK in connection with the non-UK company’s trade (“the avoided PE”).
  • Whether or not the mismatch condition is met.  
• Where the company is potentially within the scope of DPT because it is a non-UK company which has avoided creating a taxable presence in the UK and the mismatch condition is met:
  • The nature of the material provision.
  • The identity of the other person that is party to the material provision.

Additional information which may be provided to HMRC

HMRC’s DPT guidance states that companies notifying HMRC that they are potentially within the scope of DPT will help to resolve the issue more quickly if they provide additional information with their notification which explains why they consider the notification obligation applies to them and include, as appropriate:

• a current worldwide group structure, identifying how relevant entities are treated for tax purposes in relevant jurisdictions,
• a functional analysis of global supply chains and operations relating to the UK,
• a value chain analysis of the complete activity undertaken by the group,
• details of intellectual property and related payments (including royalties) that are connected, directly or indirectly, with activity in the UK,
• A summary of financial and tax data for UK entities and other entities that should be considered in determining whether DPT applies. Specifically, information showing the profitability of all relevant entities, and especially any low tax entities, will be important.

Exemptions from notification requirement

In certain circumstances notification will not be required – in particular if:

• It is reasonable to conclude that, ignoring transfer pricing adjustments,  no DPT charge for the current period would arise;
• It is reasonable to conclude that the company has already provided sufficient information for HMRC to make a decision as to whether a preliminary notice should be issued;
• Notification has previously been made of the same arrangements for the preceding AP and there are no changes (clearly this will not be available for the first accounting period potentially affected by DPT);
• Before the end of the notification period, HMRC has stated no notification is required.

Consequences of Failing to Notify

Failure to notify HMRC carries with it significant consequences.  Firstly, tax-geared penalties and, secondly, it extends the period in which HMRC can issue a preliminary notice from 24 months after the end of the accounting period to four years.  Therefore, it is important that the notification deadline is not missed.

Details of DPT are included in HMRC’s guidance issued on 30 November 2015.