Diverted Profits Tax - Increased HMRC activity
11 June 2018
HMRC has established regional multidisciplinary teams focussing on diverted profits tax (DPT) and trained up additional staff on the topic so that it can now handle a larger number of reviews and tax enquiries.
In terms of figures, last year HMRC issued 14 charging notices and 16 preliminary notifications. This year it expects to issue notices and notifications to up to 50 groups (though some groups may receive more than one notification). While the numbers may not seem huge, they are clear evidence of increased activity levels and we understand that this will allow HMRC to spread its net to new areas.
We have been made aware that the new wave of DPT enquiries are likely to target businesses that did not initially notify HMRC of a potential DPT liability (likely to be smaller mid-sized businesses). Remember, when it comes to the DPT rules companies with fewer than 250 employees and a turnover of less than €50m (or a balance sheet total of less than €43m) count as small and medium-sized companies (SMEs) so are exempt. However, all parties to a particular transaction must meet this test for the exemption to apply.
What is HMRC looking for?
The DPT legislation is designed to tackle and remove tax mismatches that arise from two types of arrangement:
- No permanent establishment in the UK – ie where a person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity does not create a UK permanent establishment for the foreign company. Tax will be charged if HMRC believes it is reasonable to assume there is a tax avoidance purpose for, or a tax mismatch created by, these circumstances. However, an exception applies where UK-related sales are less than £10m or UK-related expenses are under £1m.
- Insufficient substance - where an entity within the charge to UK corporation tax is party to a transaction or series of transactions with a connected overseas company, a tax mismatch exists, and the overseas entity contributes little substance to the transaction. This potentially affects groups using central IP companies, centralised purchasing and services companies, limited risk distributors and those making rental payments overseas.
As always with such enforcement work, HMRC will do its research before launching a formal tax enquiry and this gives the taxpayer some advance warning of HMRC’s interest. HMRC has the power to request detailed information on pricing arrangements without the need to launch a formal DPT tax enquiry – so a request for such details is an early indication that officers are carrying out a risk assessment on your business.
However, it is vital to seek expert advice as soon as such a request is received. The opening response to any information notice or enquiry will be important - a significant delay in response could be perceived negatively by HMRC. So it is important that all companies and groups that could face such a challenge (for example those that have significant cross-border payments or low tax companies in the group) have strong documentation in place so that it can be supplied to HMRC immediately.
We also expect auditors to look for potential DPT issues when auditing the financial statements of groups this year in light of these developments.
For help and advice on DPT or any international tax issue please contact Ross Robertson.
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