Everything you need to know about Diverted Profits Tax

Diverted Profit Tax (DPT) is designed to counter the use of any aggressive tax planning techniques used by multinational enterprises to divert profits from the UK.

DPT applies to profits gained since the 1st April 2015 and focuses on contrived arrangements that are designed to erode the UK tax base. DPT is purposely set at a higher rate than corporation tax as to encourage those businesses with arrangements within the scope of DPT to change those arrangements and corporation tax on profits in line with economic activity.

 

Who is affected?

1.     UK companies that uses entities or transactions that lack economic substance to exploit tax mismatches

2.     Foreign Companies with a UK-taxable presence that uses entities or transactions that lack economic substance to exploit tax mismatches

3.     Individuals who carry on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a permanent establishment in that UK, with an intention to avoid tax.

DPT has it’s own individual set rules for notification, assessment and payment. Diverted property tax is not self-assessed, however companies are required to notify the HMRC within 3 months of the end of an accounting period in which they are potentially within the threshold of the tax and do not meet set conditions for exemptions. There is a penalty for those who fail to do so.

Exemptions from liability

General exemptions

·       Small and medium enterprises ( EU definition) are not subject to the DPT

·       Certain loan relationships are not subject to the DPT

·       Where a mismatch arises solely due to persons being exempt from tax by reason of being a charity, pension scheme or having sovereign immunity, the DPT will not apply.

 

Avoided PE exemption

·       Activities of agents of independent status are excluded

·       Certain alternative finance arrangements are excluded

·       Foreign companies are not subject to the avoided PE DPT charge where either

·       Their total UK-related sales revenue in a 12-month period does not exceed £10m

·       Their total UK-related expenses in a 12-month period does not exceed £1m.

 

Contact us for specialist accounting advice regarding diverted profits tax