Five Facts about the Proposed UK Diverted Profits Tax

The UK government has proposed its “diverted profits tax” in order “to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base.” There follows a simplified overview of the proposed legislation.

1. It’s not aimed at any single taxpayer. All companies selling goods or services into the UK are within the scope of the tax. Historically, a non-resident company has been subject to tax in the UK only if it had a permanent establishment there, or was within the scope of withholding taxes on certain types of passive income paid from the UK. Under the proposals, a tax charge will arise on any non-UK company:

  • which is supplying goods or services to a customer in the UK that involve a person in the UK; and
  • is doing so in circumstances where it is reasonable to assume that the UK person’s activities are intended to ensure that the non-UK company is not subject to tax in the UK; and
  • it is reasonable to assume that one of two conditions relating to a reduction in UK tax are met.

Note that it just has to be reasonable to make these assumptions!

The tax charge can also apply to UK companies that have arrangements with affiliates which lack economic substance and which result in a reduction in UK tax.

2. Companies will have to notify the UK tax authority (HMRC) of a potential tax charge even if there is no reasonable assumption that there is any reduction in UK tax. The notification must be made within three months of the end of the accounting period for which a potential charge could arise. A company has to notify HMRC that there might be a diverted profits tax charge if:

  • the company is not UK resident; and
  • someone carries on any activity in the UK related to the supply of goods or services by the company to UK customers; and
  • it does not have a UK permanent establishment relating to that activity.

These provisions will catch more or less any company doing business with UK customers.

A UK company will also have to notify HMRC where it does business with non-UK affiliates which could result in a reduction in UK tax which is larger than the corresponding tax charge in its non-UK affiliate.

3. The diverted profits tax charge has to be paid within thirty days of HMRC issuing a charging notice (plus interest, unless an estimated payment was made when the notification was given). This requirement will apply even if the charging notice is appealed.

4. It’s more than the UK corporation tax charge. The charge is 25 percent of the “diverted profits” – the amount which it is reasonable to assume would have been taxed in the UK if the arrangements had been a reasonable alternative. By comparison, the UK corporation tax rate will be 20 percent from 1 April 2015.

5. This tax proposal is going ahead, despite the UK’s general election in May 2015 and the ongoing OECD BEPS project.

The government has confirmed that it intends to pass the legislation for this tax charge before the election, and the opposition has indicated that it will not challenge the introduction of the tax.

All that said, the diverted profits tax is intended mainly to persuade companies to overhaul their tax arrangements with the UK, rather than to specifically raise substantial amounts of tax.

Available Material

  • HMRC Tax Information and Impact Note and Consultation Draft of Proposed Legislation (Dec. 10, 2014).
  • HMRC Diverted Profits Tax Guidance (Dec. 10, 2014).