View the related Tax Guidance about Diverted profits tax
Diverted profits tax ― overview
Diverted profits tax ― overviewBackgroundThe diverted profits tax (DPT) was introduced by Finance Act 2015, ss 77–116 and Sch 16. The aim of the DPT is to deter multinational groups of companies from implementing aggressive tax planning techniques which divert profits away from the UK in an attempt to minimise the group’s overall corporation tax bill. The DPT legislation applies to accounting periods beginning on or after 1 April 2015. There are apportionment rules for accounting periods that straddled that date. HMRC guidance on the DPT can be found at INTM489500 onwards.This guidance note helps readers to understand the basic principles of the DPT regime to enable them to ascertain whether a particular scenario is likely to attract a charge to DPT, with links to additional sources of information as appropriate. These include articles from Taxation and Tax Journal relating to DPT. For additional expert commentary on DPT, see also ‘Introduction to Diverted Profits Tax ― update’, by Paul Bowes, Tolley’s Tax Digest, May 2019 ― TTD, Issue 199[1.1]The Government ran a consultation until 14 August 2023 on potential changes to the UK legislation on transfer pricing, permanent establishments and diverted profits tax. The key consultation question on diverted profits tax is whether to remove DPT as a separate tax and instead bring it into the corporation tax regime. A summary of responses was published on 16 January 2024. In October 2024, the Government announced as part of its Corporate Tax Roadmap, that a second-round consultation would be held
Calculating taxable diverted profits ― avoided PE cases
Calculating taxable diverted profits ― avoided PE casesCalculating taxable diverted profits ― step oneOnce it has been established that a charge to diverted profits tax (DPT) has arisen in accordance with the conditions of FA 2015, s 86, as set out in the DPT ― avoidance of UK permanent establishment guidance note, it is then necessary to calculate the quantum of the non-UK company’s profits (if any) that will be subject to the charge. The aforementioned guidance note should be read prior to reading this one. There are three statutory ways in which the amount of taxable diverted profits may be determined, under FA 2015, ss 89, 90 and 91 (although there are technically four if sections 91(4) and 91(5) are considered separately), which are set out in Step two below. In order to determine which of these methods apply, it is necessary to determine whether or not the ‘mismatch condition’ (defined in the DPT ― avoidance of UK permanent establishment guidance note) applies and, if so, whether or not the ‘actual provision condition’ (defined below) then applies at the same time.This latter concept plays an important part in the calculation of taxable diverted profits involving ‘mismatch condition’ arrangements under FA 2015, ss 90 and 91. FA 2015, s 89 deals with avoided PE situations not involving ‘tax mismatch condition’ arrangements, ie where the ‘tax avoidance condition’ solely applies.The comments above reflect the flowchart shown in HMRC’s guidance notes to calculate diverted profits under FA 2015, ss 89–91. In
UK filing requirements
UK filing requirementsOverview of UK filing requirementsAn overseas company may be required to file a number of UK tax returns with HMRC. This guidance note outlines the corporation tax and income tax filing requirements which an overseas company may have in respect of different types of income.See also Simon’s Taxes A4.1.The overseas company may wish to authorise a UK agent to act on its behalf, using the normal agent authorisation form 64-8.In addition, if an overseas company has employees who spend time in the UK (even for as little as 30 days), it may be required to file returns in respect of PAYE and National Insurance. See the Non-resident employers and liability to PAYE in the UK and Coming to the UK ― UK employment guidance notes. See Simon’s Taxes Division E8.7.Depending on the nature of its activities, an overseas company may also be required to file UK VAT or other indirect tax returns, eg a company which operates under a UK remote gaming license will be subject to gaming duties.Finally, an overseas company may be required to make non-tax filings, eg filing accounts with Companies House. See the Overseas companies in the UK: registration and filing obligations guidance. See also Simon’s Taxes A7.135 in relation to the filing obligations on companies under the Register of Overseas Entities regime. Trading incomeIf the overseas company has a permanent establishment in the UK, then it will be subject to UK corporation tax in respect of the profits of the permanent establishment.For
Setting up overseas ― branch or subsidiary
Setting up overseas ― branch or subsidiaryAlthough a UK company can do a reasonable amount of business in another country without a taxable presence in that country, eventually the company may need to consider whether to establish a more formal presence in such a country. This is generally done by way of a branch (also called a permanent establishment or PE) or subsidiary. For a a discussion of when this decision should be considered and a general introduction to the tax issues that can arise when a UK company decides to expand overseas, see the Setting up overseas ― companies guidance note.The decision will often usually depend on commercial factors, particularly where there are regulatory requirements. For example, a branch rather than a subsidiary may be greatly preferred where regulatory requirements demand a particular level of capital as this may be more easily satisfied through a branch structure where the parent company capital is taken into account.Where there is no particular commercial pressure for one legal form over another, tax issues may influence the decision.Note that due to the restrictions on the use of losses (see below), if the trade is entirely overseas then a local subsidiary is generally the best choice of structure. This is a different analysis to where the trade is partly in the UK and partly overseas (which is the usual situation, and which this note mainly addesses).This note focuses on the UK tax issues that can arise from operating overseas through a branch or
Permanent establishment
Permanent establishmentA company that is not resident in the UK will only be subject to UK corporation tax if it carries on a trade in the UK through a permanent establishment. Where it does so, it will be subject to UK corporation tax on all profits that are attributable to the UK permanent establishment. There are exceptions to this rule for any person:•dealing in and developing UK land ― see the Transactions in UK land guidance note for further information•directly or indirectly disposing of UK land ― see the Disposals of UK land by non-resident companies (NRCG regime) ― overview guidance note•that generates profits from a UK property business ― see the Non-resident landlords scheme (NRLS) guidance noteCTA 2009, s 5(2)This guidance note outlines when an overseas company will have a permanent establishment in the UK and how to calculate the profits attributable to that permanent establishment.The same principles may apply when determining whether a UK company has a permanent establishment in another country. In any case, where a double tax treaty is in place, this will typically provide that a UK company is only subject to tax in another country if it has a permanent establishment there. Most of the UK’s double tax treaties follow the Organisation for Economic Co-operation and Development (OECD) model tax treaty and the definition of permanent establishment is therefore the same as the UK definition.As part of the OECD’s base erosion and profit shifting (BEPS) project, changes were proposed under
Weekly case highlights ― 25 November 2024
Weekly case highlights ― 25 November 2024These are our brief notes and thoughts on cases published in the last week or so which caught our eye and are likely to be of particular interest to tax practitioners. Full case reports and commentary on most of these cases will be included within our normal reference sources in the coming weeks.Business taxCobalt Data Centre v HMRCThe Tyne Riverside Enterprise Zone’s tax-favoured status came to an end nearly 20 years ago, but it is only with this Supreme Court decision that finality has been reached in respect of the tax position of a data centre building at the zone. Yet that dispute is essentially only about the meaning of a single word: ‘under’. Expenditure incurred ‘under’ a contract entered into during the life of an Enterprise Zone qualifies for relief if it is incurred within ten years of the cessation of the zone’s tax-favoured status. Here, a so-called golden contract was signed two days before the end of the tax-favoured status period. This set out a range of alternative projects which the developer was entitled to require the contractor to build. The expenditure in dispute was incurred within this second ten-year period.In a nutshell, the question before the Court was whether the expenditure on the data centre that was eventually built was incurred ‘under’ that contract. Or was it the case that a new set of requirements for the construction of a data centre (which had not been referred to in the
How to establish if there is a UK permanent establishment
How to establish if there is a UK permanent establishmentThe concept of permanent establishment (PE) is important for international groups because it will often determine whether a company has sufficient activity in another jurisdiction to create a taxable presence there.For example, a company that is not resident in the UK will still be subject to UK corporation tax if it carries on a trade in the UK through a PE. Where it does so, it will be subject to UK corporation tax on all of the profits that are attributable to the UK permanent establishment. There are exceptions to this rule for any person:•dealing in and developing UK land ― see the Transactions in UK land guidance note for further information•directly or indirectly disposing of UK land ― see the Disposals of UK land by non-resident companies (NRCG regime) ― overview guidance note•that generates profits from a UK property business ― see the Non-resident landlords scheme (NRLS) guidance noteCTA 2009, s 5(2)In many cases, the focus will be on a company not creating a PE or minimising the profits that are attributable to that PE. However, in some cases, a company may specifically want to create a PE (for example, a UK company may want to take advantage of the branch profits exemption, see the Foreign branch exemption ― overview guidance note).Outlined below is a suggested approach for tax advisers (both in-house and in practice) on how to determine whether a permanent establishment exists. This guidance
Accelerated payment notices
Accelerated payment noticesIntroductionAccelerated payment notices (APN) were introduced with effect from 17 July 2014 and allow HMRC to require early payments of disputed tax and / or national insurance contributions (NIC) in relation to certain tax avoidance cases. HMRC can issue APNs to require early payment where those cases are subject to an open enquiry or appeal.Up until then, HMRC generally allowed disputed tax to be postponed under TMA 1970, s 55, pending the outcome of the enquiry or litigation. This meant that effectively the taxpayer had a low-interest loan from the Government until the case was settled, which could be a number of years.The rules also reflect Parliament’s approach of using tax policy to influence the behaviour of taxpayers and advisers. Given the need to pay the tax much sooner, it was hoped that the appetite for such avoidance schemes would be reduced.This guidance note covers the rules which apply to APN that are issued to individuals or companies (including APN which relate to PAYE and NIC liabilities issued to such persons as employers). It does not cover APN issued to partners and partnerships, known as partner payment notices (PPN). The procedure for PPN is slightly different, see section 2.16 of the HMRC guidance and Simon’s Taxes A7.248C.SummaryHMRC can require accelerated tax payments via an APN where the tax arrangement producing the tax advantage is under enquiry or appeal and either:•the chosen arrangements are notifiable under the DOTAS rules and have been notified•HMRC has given a
DPT administrative process
DPT administrative processThere are several administrative matters and deadlines to be aware of in connection with diverted profits tax (DPT). The key provisions are listed below.Duty to notify HMRCA company is not required to self-assess its liability to DPT. Rather, if it is potentially within the charge to DPT, it is under a duty to notify HMRC within three months following the end of the relevant accounting period. For accounting periods ending on or before 31 March 2016 (ie the first year of application of DPT), the notification deadline was extended to six months from the end of the relevant period. The notification must be made by the affected UK resident or foreign company in writing and must state:•whether the duty to notify arises as a result of FA 2015, ss 80 or 81 (entities or transactions lacking economic substance), or FA 2015, s 86 (avoidance of a UK permanent establishment (PE))•the name of the avoided PE in FA 2015, s 86 cases•in FA 2015, ss 80 or 81 cases, a description of the material provision (ie the transaction(s)) involved, together with the names of the parties concerned•in FA 2015, s 86 cases, whether or not the mismatch condition is met, and if it is, a description of the material provision involved, together with names of the parties concernedFA 2015, s 92(9); INTM489886The penalties for not notifying when a notification is subsequently found to have been required are based on ‘potential lost revenue (PLR)’ (see
DPT ― entities or transactions lacking economic substance
DPT ― entities or transactions lacking economic substanceA charge to diverted profits tax (DPT) for an accounting period can arise if one or more of the following three scenarios apply:•a UK company uses entities or transactions which lack economic substance•a non-UK company uses entities or transactions which lack economic substance•a non-UK company avoids creating a UK permanent establishment (PE)FA 2015, s 77(2)This guidance note sets out details of the charge to DPT in respect of the first two scenarios. Detailed examples of section 80 and section 81 cases can be found in HMRC’s guidance at INTM489780 onwards, including the application to particular types of assets and industries.See the DPT ― avoidance of UK permanent establishment guidance note for details of the charge arising in the third scenario.FA 2015, ss 80 and 81 are an extension of the UK transfer pricing provisions in situations where profits are diverted from a company with a UK corporation tax presence, to related persons (related by the ‘participation condition’ set out below), that give rise to a significant tax reduction as defined under the DPT legislation (using the ‘80% payment test’ ― see below). The related persons can be based either in the UK, by being resident or by having a PE in the UK (broadly in circumstances where advantageous UK tax arrangements apply), or outside the UK. Like the UK transfer pricing rules, reference is made to provision (the ‘material provision’) made or imposed between two persons (in the case
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