The Diverted Profits Tax was introduced in Finance act 2015 and its purpose was to prevent the avoidance of tax by corporates in situations where a UK company uses arrangements lacking economic substance to divert profits to offshore jurisdictions or where a foreign company seeks to avoid creating a UK permanent establishment by implementing their UK activities in an artificial way.
DPT works by charging tax at a rate greatly in excess of the ordinary CT rate on profits found to have been diverted as described above.
At present an HMRC officer has only 12 months to carry out a review to determine the level of profits which should be subject to DPT and following this and the expiry of the DPT time-limits, amendments can be made to a company’s tax return.
Legislation will be introduced in Finance Bill 2018-19 to amend Part 3 Finance Act 2015 in order to prevent the ability of companies to amend the return after the review period and extend the review period to 15 months.
Changes will also be made to encourage compliance, allowing a taxpayer amendment within the first 12 months of the review to bring diverted profits back into the CT charge and to make it clear that diverted profits will only be taxed under CT rules or DPT, but not both.
These changes will impact multi-jurisdictional businesses where the transactions between the UK and foreign companies are perceived to lack economic substance or arrangements are viewed by HMRC artificial.