Diverted Profits Tax

Following publicity given to global companies structuring their operations to minimise their exposure to UK tax, the UK government has introduced a new tax called the Diverted Profits Tax (DPT). The rate of tax is 25%. This compares to corporation tax at 20% falling to 17% in 2020.

Targeted at what HRMC describes as "aggressive tax planning that erodes the UK tax base through diversion of profits", the breadth of the legislation creates uncertainty over whether it could apply to seemingly benign arrangements to reduce tax.

In practice, much will depend on the general approach taken by HMRC. Until we have a better understanding of that, businesses will want to know the sort of arrangements that could be challenged and so consider alternatives.

When will it apply?

The DPT has two limbs - involvement of entities or transactions lacking economic substance and avoiding a UK taxable prescence.

Involvement of entities or transactions that lack economic substance This targets a company in the UK that makes payments or passes income to an affiliate in a jurisdiction where the effective tax rate is less than 80% of the UK rate and the tax saving outweighed the other benefits. This could potentially impact a UK company making payments to an affiliate in Ireland given that country's tax rate of 12.5% or even a UK company making royalty payments to affiliates in France with its special tax regime for intellectual property. Avoidance of a UK taxable presence This targets a non-UK company trading with UK customers and which has some activity in the UK but designed in a way to avoid creating an actual UK tax presence. The DPT charge is on the additional profits which would have been attributed to the company if there had been a UK presence. This could potentially impact almost all non-UK companies that do business in the UK. While they may have no actual UK tax presence, it would not normally be that difficult to point to some activity in the UK, eg marketing, support or research. Exclusions

Small and medium-sized businesses are excluded as are loan transactions. The avoided UK tax presence limb does not apply if sales do not exceed GBP 10 million or UK expenses are less than GBP 1 million.

Examples of when DPT could apply:

Insurance examples

A multinational manufacturer of specialist high value plant in a number of European countries with a UK subsidiary has product insurance indemnity with a large insurer but places the50m excess on its insurance policy...