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Short…But Not Sweet

Diverted Profits Tax: What should you do now?

We have deliberately kept today’s blogpost short and concise.  We wish to focus your attention on the arduous and laborious steps that groups must now take to assess how the DPT applies, to mitigate a charge and the very short time frame within which to do this.

If you…

…tick yes to all the bullet points below, you will have a DPT charge of 25% on your ‘diverted profits’.

  • Are you a large group?
  • Do you have UK sales of services, goods or any other property totalling £10m or more in your current accounting period (AP)?
  • Are you 1) a UK company that directly or indirectly makes payments to connected parties outside the UK (e.g. royalties, service fees); or, 2) a foreign company that has taken steps not to create a UK permanent establishment?

What are diverted profits?

You can only identify whether you have diverted profits by working through and applying the new DPT legislation.  HMRC, however, are entitled to make a ‘best estimate’ of your diverted profits based on the information available to them.  Following a notice of assessment from HMRC as to what it considers your diverted profits to be, you must pay the punitive tax (at 25%) thereon, within 30 days.  You then have 12 months to agree the actual tax due (if different) with HMRC.

If you carry out a DPT assessment now and provide your analysis to HMRC within the prescribed notification window (see table below), you should be able to drive the process and avoid a situation where your starting point is HMRC’s wildly inaccurate best estimate.

As such, we strongly recommend you take the initiative and undertake a DPT assessment.

Not taking any action

…and not making the appropriate notifications to HMRC within the prescribed timeframes will result in:

  • HMRC ‘best estimating’ the DPT charge due, payable 30 days after HMRC gives notice of their assessment; and
  • Tax geared penalties and interest.

You must take steps to…

  • Undertake an initial high level assessment of how the rules will apply to you;
  • Consider whether a DPT charge arises;
  • Where appropriate, mitigate the DPT charge (such as adjusting your existing transfer pricing policy, seeking an advanced pricing agreement, utilising an existing advanced pricing agreement, evidencing that even under the so-called ‘alternative transaction’ provision no further profits are due to the UK etc); and
  • Speak with your Customer Relationship Manager (CRM), if you have one, or you can contact HMRC’s specialist DPT team. It should also be possible to seek a non-statutory clearance (i.e. an opinion from HMRC) as to how the rules apply to your business.

When?

For APs ending on or before 31 March 2016, you have 6 months from the end of your accounting period to notify HMRC of your position.  APs falling after this date only have 3 months from the end of the relevant AP.

To highlight the short timeframe in which groups have to assess the DPT charge and take necessary steps to mitigate it, we have included a table setting out the notification deadlines for common year-end dates.
table

As the first step, you may wish to use Milestone’s Plain English Guide to the DPT to assess whether you or your clients have a DPT exposure.  You can download the guide here. 

If you need some support or a soundboard in assessing your risk, please contact Zoe or Andy.

Zoe Wyatt

DDI: +44(0) 20 7534 7183

Email: zoe@milestonetax.com

Andrew Murray

DDI: +44(0) 20 7534 7182

Email: andrew@milestonetax.com

April 10, 2015

Zoe Wyatt

Posted by Zoe

Zoe is a Partner at Milestone, she brings extensive knowledge of international tax systems with a special interest in double tax treaties, exploitation of IP and the role of EU law.

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