The diverted profits tax has existed for more than two years, but has it achieved what it was created to do or is it just being used to boost Treasury coffers and settle old claims?
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This article was first published in the November/December 2017 UK edition of Accounting and Business magazine.
Back in 2015, the then chancellor George Osborne launched his latest weapon in tackling tax avoidance. Dubbed the ‘Google tax’, the diverted profits tax (DPT) was intended to deter large multinational groups from shifting their profits out of the UK through ‘contrived arrangements’. The tax imposes a 25% rate on such profits, rather than the lower standard rate of corporation tax, which currently stands at 19%. At the time, it was argued that the tax would affect very few companies. As its nickname implies, it was aimed at, among others, large technology companies that were able to structure themselves so they paid minimal tax in the UK.
But that was 2015. Two years on and HMRC has revealed how much tax has been raised through the DPT, how many notices to pay have been issued and how much has been added to the corporation tax yield by any consequent change in behaviour. The figures make for interesting reading.
According to HMRC, the anticipated Exchequer impact of DPT at the 2015 Budget was £25m in 2015/16 and £275m in 2016/17. The actual figures are a remarkably similar – £31m and £281m, respectively. These include the subsequent uplift in corporation tax raised from those groups that declared increased UK profits rather than risk paying the higher-rate DPT. That said, the amount raised from the first issue of DPT charging notices (14 such notices were issued in 2016/17) came in at £138m.
But to see the full picture, one needs to understand how the system works. Companies have to notify HMRC if they believe they have arrangements that potentially fall into the DPT’s scope. In 2015/16, HMRC received 48 such notices, but this figure trebled in 2016/17, reaching 145. Following notification, there is a strict, and tight, timetable (see box). The key point, however, is that once a charging notice has been issued, companies are required to pay within 30 days. It is, as ACCA’s head of tax Chas Roy-Chowdhury describes it, ‘like transfer pricing, but on steroids’.
Taking the money
‘Most businesses have tried to structure themselves so that they are not caught, so there needs to be thought given to how this cashflow is being taken off businesses,’ Roy-Chowdhury says. ‘With transfer pricing, companies will have their files ready in case there is a challenge, but with DPT the paperwork needs to be ready upfront.’
And as law firm Norton Rose Fulbright points out in a recent client briefing note, it is expected that groups with ongoing transfer pricing (TP) disputes are particularly at risk of receiving DPT notices. This could impose considerable pressure on companies to settle such disputes prior to their DPT deadlines. And as if to prove this point, the HMRC figures show that revenue from TP settlements has risen from £1bn to £1.6bn over the last two years.
The DPT deadlines themselves are also expected to create a flurry of notices in the near future. We have already seen drinks giant Diageo reveal that it is subject to a DPT notice to the tune of £107m. As the two-year notification deadline approaches for December year ends, a host of other companies are also expected to declare they have found themselves on the receiving end of payment demands.
It is little wonder, then, that some tax experts feel HMRC’s approach could be described as ‘aggressive’. As Heather Self, tax partner at international law firm Pinsent Masons, says: ‘The DPT was a pre-election move. Back then there were reassuring noises that it would apply to a handful of companies, but we are seeing it used more widely now. Transfer pricing is never an exact science, but it is evident that DPT is being used as a lever. Is this legitimate? That is hard to say.’
Self adds that the mechanics of the DPT system, where there is a ‘pay first, argue later’ approach, creates an incentive for corporates to reach a settlement over transfer pricing disputes with HMRC sooner rather than later, especially with the two-year deadline fast approaching for many companies.
‘HMRC’s track record of winning avoidance cases is very good, but these have been mainly about artificial schemes. However, I think HMRC is now using DPT to attack transactions that have substance,’ Self observes.
Roy-Chowdhury agrees that there appears to be a more aggressive approach than expected. ‘First, this is a new measure, so HMRC shouldn’t be jumping on companies like this, but secondly, HMRC is getting the people and resources to look at these companies, which is perhaps why there hasn’t been a soft landing. I would urge HMRC to row back and think about the impact.’
However, despite attempts to challenge the whole process - a high court recently rejected Glencore Energy’s application for judicial review of a DPT charging notice - more notices are expected, which could well lead to a change in corporate structuring as well as a boost to the Treasury’s coffers.
Phil Smith, journalist
CPD technical article
"A host of other companies are also expected to declare they have found themselves on the receiving end of payment demands"