HMRC’s DPT specialists and Diverted Profits Board will be having a busy run-up to Christmas as they work to issue a wave of preliminary notices to businesses with DPT liability.
DPT was introduced in 2015 as a unilateral initiative of the UK Government to counter aggressive tax avoidance, in particular so-called base erosion and profit shifting (BEPS), by multinational groups. It has been criticised as incompatible with tax treaties and with European law, but this is not deterring HMRC.
How DPT is applied
DPT, which applies a penal 25 per cent rate to ‘taxable diverted profits’, operates in two ways. The first targets entities or transactions with ‘insufficient economic substance’. For example, transactions that shift profits to ‘letter box’ companies (businesses that establish their domicile in a tax friendly country with limited valuable people functions).
The DPT also targets so-called ‘avoided permanent establishments’, for example where sales support arrangements in the UK are designed to fall just short of the conclusion of contracts binding a non-resident principal (as was said to be the case for Google).
‘Pay now, appeal later’
Groups potentially within the scope of the tax are obliged to notify HMRC. Where notification is duly made, HMRC have two years after the end of an accounting period to issue a ‘preliminary notice’ asserting a DPT liability. For groups with a 31 December year end, the hard deadline for HMRC to issue notices is therefore now rapidly approaching in relation to 2015.
Unusually, DPT operates a ‘pay now, appeal later’ regime so companies receiving DPT notices for 2015 will have to pay the DPT in early 2018 but will have to wait a year before they can appeal to the tax tribunal.