Businesses are paying more tax than anticipated under the government’s diverted profits tax (DPT), possibly as a result of companies being over-cautious, according to a leading international law firm
Pinsent Masons say the amount collected from DPT increased by over a third to £388m in 2017/18, up from £281m in the previous year. According to their research, the tax burden on businesses from DPT is significantly higher than first anticipated and exceeds the forecasted £360m that the Exchequer anticipated would be the impact of DPT. Since the tax was introduced in 2015, estimates for revenues have been exceeded every year. Just 22 businesses received charging notices from HMRC in 2017/18 – highlighting the large size of many of the payments made.
DPT is designed to deter activities that divert profits away from the UK in order to avoid corporation tax. A DPT investigation can be settled by adjusting Transfer Pricing so more UK corporation tax is paid. DPT is paid at 25%, as opposed to the corporation tax rate of 19%.
Ian Hyde, Partner at Pinsent Masons, commented saying: ‘Businesses will be concerned that the impact of Diverted Profits tax is significantly more than anticipated. HMRC clearly has the UK’s biggest businesses in its sights, and the DPT is having a bigger financial impact than expected when the rules were introduced.
‘It is unlikely that there has been an increase in companies using structures potentially caught by DPT, so the increase in companies making DPT notifications from 145 in 2016/17 to 220 in 2017/18 suggests that companies are now taking a more cautious line in notifying potential liabilities, even for structures they may not have originally notified for earlier years.’
Meanwhile, Pinsent Masons says the amount of tax collected through Transfer Pricing disputes has increased 4% to £1.7 billion in 2017/18, up from £1.6 billion in 2016/17.
The firm claims HMRC is increasingly taking longer to resolve disputes with the average time taken now longer than two and a half years, up 11% in just a year from 27.3 months. However there is an increase in the percentage of disputes being settled earlier, with 50% of disputes now being settled within 20.6 months (in contrast to 29.4 months in 2016/17).
Ian Hyde says: ‘Many of the transfer pricing disputes being settled quickly are likely to be those where a DPT charging notice has also been issued. Faced with the risk of DPT at 25%, groups are keen to take a transfer pricing adjustment to settle for tax at 19% and to do so groups have to settle within the 12 month review period’.
Transfer Pricing refers to the necessary charges made between different parts of a multinational business for goods, services or intangible assets, including intellectual property. Tax rules provide that transactions between connected parties should be taxed as if they were on arm's length terms.
In recent years, multinationals have been accused of arranging their transfer pricing to minimise their tax liabilities in jurisdictions such as the UK.
‘Transfer pricing disputes are often incredibly complex, but the significant length of the time taken by HMRC to resolve them can create a lot of uncertainty for businesses;’ says Hyde.
Finally, Pinsent Masons point out that the number of Advance Thin Capitalisation Agreements (ATCA) being agreed has more than halved since 2015/16, with 164 agreed in 2015/16 and just 79 agreed in 2017/18.
An ATCA is an agreement between a business and HMRC which sets out how the transfer pricing rules apply to funding issues, including the appropriate levels, terms and conditions of debt financing between connected parties, so that the UK receives the right amount of tax at the right time.
‘The huge fall in ATCAs agreed by HMRC in 2017/18 is likely to be as a result of the introduction of the corporate interest restriction in April 2017, which limits the interest deductions that UK companies can claim,’ says Hyde.
Ken Almand, Partner and transfer pricing specialist at Moore Stephens, the Top 10 accountancy firm, comments:
'Such a dramatic increase in yield from Diverted Profits Tax suggests that the Government’s crackdown on tax avoidance by multinationals is paying off.'
'George Osborne stole a march on the rest of the world when he introduced the DPT three years ago. This irked the likes of the EU and the OECD who were busy developing a united front against corporate tax avoidance but HMRC now seems to be reaping the rewards.'
The amount of tax collected by HMRC through transfer pricing disputes has also increased 4% to £1.7 billion in 2017/18, up from £1.6 billion in 2016/17. However, just 16 companies approached the government last year to negotiate advance pricing agreements for transfer pricing – down from 66 in 2014/15.
Ken Almand adds: 'HMRC’s record high yield from transfer pricing disputes may be welcome news for the Government. However, advance agreements, that should be of benefit to many companies, are now taking over three years to be agreed with HMRC. This seems to be putting applicants off. It would be welcome if HMRC could look to add to their resources to reduce the length of time that these take.'
Report by Rob Munro