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finance 51


Are you ready for the diverted profits tax?


Round one of the battle of HMRC versus 'the multinationals' commenced on April 1, with the introduction of the diverted profits tax (DPT), writes Suze McDonald, partner, Baker Tilly


The DPT is specifically aimed at multinational enterprises (MNEs) who have aggressively structured their tax affairs in such a way as to minimise their UK corporation tax liability and in a manner which does not reflect the economic substance of the business that is being carried out in the UK.


The Government announced in December 2014 its intention to accelerate certain aspects of the BEPS plan into UK legislation, which culminated in the introduction of a brand new piece of statute in just over four months – undoubtedly with no connection to the fact that this crowd-pleasing piece of legislation was introduced just before the General Election. However, I personally haven’t noticed a reduction in the queue at Starbucks or nor have I received any emails offering me a 60-day free trial of Amazon Prime to entice me back as a customer, should I have been totally offended by their stance on paying UK tax. Business seems pretty stable in the UK for these notorious MNEs.


It should also be noted that the legislation even had cross-party support during the run up to the General Election, with Margaret Hodge unsurprisingly, and rather predictably, welcoming the strike against multinationals and their avoidance of corporation tax.


The legislation is here now and here it looks set to stay, so what exactly is this DPT and how would I know if it affects my business? Put simply, there are essentially two main scenarios that this legislation has been designed to hit hard:


1 Where a non-UK resident company undertakes a material amount of business with UK customers (more than £10 million per annum), but in such a way that a UK permanent establishment is avoided.


2 Where UK companies or UK permanent establishments make payments to non-UK resident entities which are based in a tax jurisdiction where the resultant tax liability is less than 80% of that which it would have been in the UK, and there is a lack of sufficient economic substance to justify to the charge.


Multinational groups must therefore consider whether or not they need to notify HMRC of a potential liability to DPT. This could arise for a company which is already within the scope of UK corporation tax, or in relation to entities that are not, but may be in scope for DPT. Advice should therefore be taken initially by MNEs to assess whether or not they have a requirement to notify HMRC that a DPT charge may arise. There are of course certain exemptions to the DPT, but the relevant rules are complex and detailed analysis will be needed to determine whether any exemptions apply.


If there is a duty to notify HMRC, a company must do so within three months after the end of the relevant accounting period, although this deadline is extended


THE BUSINESS MAGAZINE – THAMES VALLEY – JULY/AUGUST 2015 www.businessmag.co.uk


to six months for the first accounting periods affected by the introduction of the DPT. A company with a year end of December 31, 2015 will therefore have to notify HMRC by June 30, 2016. Once HMRC has received notification that a DPT charge may be in point, it will issue a preliminary notice. The recipient of the notice then has 30 days to make representations, which HMRC will consider. Subject to considering these representations, HMRC will then issue a charging notice for the full amount of tax it believes is payable. A 12-month review period then follows in which HMRC can issue an amending notice and repay overpaid DPT or issue a supplementary charging notice, again which the company can appeal.


It should be noted that any profits assessed under the DPT legislation are taxed at a rate of 25% – presumably a little higher than the standard corporation tax rate of 20% to encourage companies to re-structure their affairs, which would rebuild the base of the taxes being eroded.


The idea of a piece of legislation similar to the DPT is not just confined to the halls of Whitehall. Other countries have also taken a keen interest in how the UK has drafted this legislation, with a view to introducing something similar or to wait and embrace with gusto the published BEPS proposals in summer 2015.


In summary, this is an onerous piece of legislation, placing the notification requirement in the taxpayers' hands. Companies that choose not to invest any time into considering their position, do so at their own risk. This could however result in the company having to pay additional DPT up front, while negotiations ensue with HMRC to try and resolve their affairs. It is therefore far better to take a pro-active approach and the message is therefore clear – you need to come out of your corner first, fighting to make it to round two.


Details: Suze McDonald 0118-9554226 www.bakertilly.co.uk


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