Are you unsure what Diverted Profits Tax (DPT) is and how it could affect your business? In this article, we provide a summary of the DPT legislation.
What is the Diverted Profits Tax (DPT)?
The DPT is a UK tax that has applied from 1 April 2015. It targets certain specific, although widely defined, circumstances in which it is considered that taxable profits have been “diverted” away from the UK and are, therefore, not otherwise subject to UK tax.
Why was it introduced?
The DPT was introduced to deter and counteract activities that divert profits from the UK. The legislation was a response to the perception that large companies were generating significant profits from the UK, but paying very little UK tax. The DPT was intended to target those large multinationals that undertake contrived planning to avoid or reduce UK tax on profits generated in or connected to the UK.
What is the rate of DPT?
As of 1 April, 2023, where it applies, the DPT generally taxes diverted profits at a rate of 31% (in order to maintain the 6% differential between the DPT rate and the main corporation tax rate, which is now itself 25%); this is because the DPT is intended to be penal and thus discourage certain taxpayer behaviours.
Certain provisions do exist however to provide relief where the imposition of DPT results in double taxation of the same profits.
In what circumstances might the DPT apply?
Broadly, DPT applies in the following scenarios:
- Where a provision is made or imposed between a UK resident company and a related person, as a result of which the UK resident company achieves a tax reduction significantly greater than any tax increase for the other person (in other words, there is a ‘tax mismatch’), and it is reasonable to assume that the provision was designed to secure the tax reduction.
- Where a non-UK resident company is trading in the UK through a permanent establishment (PE) and the first situation in (i) above would apply to that PE if it were a UK-resident company.
- Where a person is carrying on activity in the UK in connection with supplies of goods, services or other property by a non-UK resident company, and it is reasonable to assume that any of the activity of that person or the non-UK resident company (or both) is designed to ensure that the company does not carry on a trade in the UK for corporation tax purposes and, in connection with the supplies of services, etc either the main purpose of the arrangements put in place is to avoid corporation tax, or a ‘tax mismatch’ is secured such that the total tax derived from UK activities is significantly reduced.
Given DPT has applied for eight years now, most new “structures” should be designed to avoid falling within the DPT provisions; Therefore, one would expect legacy arrangements predating 2015 to be most at risk of triggering a DPT charge.
How is DPT administered?
As a tax in its own right, DPT has its own administrative regime. At a high level, companies have an obligation to consider whether they are within the charge to DPT, and if potentially yes, notify HMRC of this. The actual charge to DPT is levied by way of an HMRC charging notice.
The rationale behind the notification mechanism is to “flush out” smaller cases which might otherwise go unnoticed and untaxed (as well as capturing the more obvious taxpayers which HMRC would already expect to target with preliminary notices). Therefore, while not “self-assessment”, taxpayers must proactively consider whether DPT could be in point for them, as failure to notify will attract penalties.
It is worth noting that since its launch in 2019, taxpayers also have access to HMRC’s Profit Diversion Compliance Facility (“PDCF”). This may be appropriate if taxpayers have identified shortcomings in their UK tax compliance in relation to arrangements of the sort targeted by DPT. The PDCF may enable companies to bring their UK tax affairs up to date before they are formally investigated in relation to DPT. The advantages of using the PDCF route are an accelerated process, potentially lower penalties, and a degree of security against future enquiry.
Double Taxation Relief
Where a company has paid:
- UK corporation tax; o
- foreign tax which is equivalent to UK corporation tax
on profits that have also suffered DPT , a credit for the corporation tax (or foreign equivalent) is allowable against the DPT liability of that company or another company in relation to the same diverted profits. This is subject to the credit being just and reasonable to be allowable.
What might the future hold?
The UK plans to adopt the Organisation for Economic Development and Cooperation’s “Pillar 2” with effect for in-scope groups’ accounting periods beginning on or after 31 December 2023. Pillar 2 seeks to impose a minimum level of global taxation on multinational enterprises by way of domestic top up tax. There is therefore some cross over with DPT, and it is yet to be seen exactly how the two will interact, with some taxpayers calling for DPT to be abolished altogether.
If you have a question regarding DPT you can contact Sarah Howarth, a Senior Manager in our Tax team, or Jay Sanghrajka, a Partner in our Tax team, using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
For more insight, events and webinars, sign up to the Price Bailey mailing list…
Have a question about this post? Ask our team...
We can help
Contact us today to find out more about how we can help you