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
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
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
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.
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
Examples of when DPT could apply:
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 the €50m
excess on its insurance policy with an intragroup insurer
established in a low tax jurisdiction. The intragroup insurer
employs three people and most of the underwriting and actuarial
risk pricing is outsourced to a specialist insurance consultancy
based in the USA. HMRC say there are likely to be very limited
circumstances where the use of intragroup insurance/ reinsurance by
a non-insurance group would not be within the lack of economic
substance limb of DPT.
A non-UK headed multinational insurance group offers bonds from
an overseas subsidiary to investors in the UK. These bonds are sold
to customers through a UK distribution agent. The offshore company
employs a team of actuaries and underwriters who design the range
of bonds but the investment management function has been
subcontracted to third party managers. The UK distribution
subsidiary introduces potential investors to the overseas company
who issues the bond to the investors. Even if the UK Company
charges an arm's length rate for its services, HMRC say the
avoided UK taxable presence limb of DPT would be likely to be in
point. However, the fact that design and origination of the bond
products is performed by the overseas company may well mean that no
additional profit on which UK tax would have been payable can be
attributed to the company.
A UK company sells a development property to an affiliate in a
low tax jurisdiction that funds the cost by borrowing and then
leases the property back to the UK company. The offshore affiliate
would be liable to pay UK income tax on the rent payable under the
lease. However, the offshore company could claim an interest
deduction in respect of its financing costs which could reduce the
actual tax charge to zero. HMRC say that this could be within the
lack of economic substance limb of DPT.
Companies must notify HMRC if they potentially fall within the
scope of DPT and the notification requirement applies in a wider
range of circumstances than the actual charge would apply to. The
deadline for notification is three months after the end of the
Under current law, where a business subject to corporation tax or income tax reallocates an existing asset into its trading stock, the basic rule is that there is a deemed market value disposal of the asset...
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