UK issues new guidance on diverted profits tax

by Anne Fairpo

The UK’s HM Revenue and Customs (HMRC) has updated its guidance on the diverted profits tax (DPT), with effect from November 30.

The new guidance replaces interim guidance published in March 2015. In practice, it builds upon that interim guidance rather than being substantially different. Given that the DPT is rather different from other UK taxes, it is likely that there will be more revisions to the guidance over the next year or two, as HMRC, taxpayers, and advisers gain experience with the tax.

The majority of the changes are additional explanatory comments, setting out a little more detail as to why or how a particular element is taken into account. Many of the examples have been expanded slightly, to make it clearer what provisions are being considered, and why. A series of flowcharts in DPT1500 onwards has also been included, considering key areas of the DPT rules.

The real estate example in DPT1360 has been corrected to take account of the non-resident landlord charge that would arise; the interim guidance had stated that DPT would be charged, but, as pointed out by a number of commentators, the effect of the non-resident landlord scheme is such that it is unlikely that there would be a real loss of UK tax in such a scenario and so a DPT charged should not be applied.

Other changes relate to changes in the UK tax code, such as the new 8 percent surcharge on banking company profits from January 1, 2016. The DPT guidance has been updated to reflect the fact that the DPT charge in relevant cases is increased to 33 percent to ensure that diverted profits that would have been surcharged are still subject to a higher rate than the corporation tax which would have been payable in the absence of diversion.

The updated guidance also includes substantial additional commentary and examples relating to more specific scenarios, including insurance intragroup fronting, Lloyd’s members, securitisation, and shipping and tonnage tax.

The DPT is a 25 percent tax charge on “diverted profits,”  introduced with effect from April 1. It is intended as an anti-avoidance measure, to counteract “aggressive tax planning techniques used by multinational enterprises to divert profits from the UK,” according to the foreword to the November 2015 guidance. In practice, the legislation is not quite as well-targeted as that.

— Anne Fairpo is a barrister at Temple Tax Chambers and a lecturer at Queen Mary University of London. She specializes in taxation of technology business.