HMRC issues updated DPT guidance

HMRC has issued updated guidance on diverted profits tax (DPT) to reflect changes to the length of the review period, and provides further information about failure to notify penalties, the first time that the document has been updated since 2015

Situations in which profits could fall under the scope of the legislation has been changed to include those that have not merely been diverted or transferred, but to situations in which ‘the first party’s income is reduced to less than it would receive under arm’s length conditions’.

Under these conditions, the amount charged for any given product by one related party to another must be the same as it would be if the parties were unrelated. In cases where intellectual property (IP) is transferred between two related companies, they are expected to do so at a reasonable rate.

The role of HMRC's diverted profits panel is also expanded to explain that 'where the panel determines the business to be low risk of diverted profits and there is already discussion with the business about the applicability of DPT, HMRC may communicate to the business that no further engagement on DPT is currently planned'.

However, if the panel believes that a business is high risk for DPT and decides to authorise opening an investigation, 'HMRC would then consider whether there are sufficient resources available to progress that investigation at pace to meet DPT deadlines. If not, HMRC would wait until the necessary resources required to investigate the arrangements become available'.

If the panel cannot determine the risk level of arrangements being within the scope of DPT, the panel ‘may ask the case team to contact the business for additional information and analysis to establish the position’.

HMRC explains that it may request factual details in entities, including how they are treated for tax purposes in their respective jurisdictions, as well as ‘cradle to grave’ information on product lifecycles.

The period under which HMRC may review the charging notice, and possible issue a supplementary charge or alterative notice, has been extended from 12 to 15 months.

Penalties for failure to notify have been expanded on to state that DPT is ‘required to be paid within six months of the end of the accounting period, after which it is treated as first ‘becoming unpaid by reason of the failure to notify’.

In some cases, following a corporation tax adjustment which ‘replaces the DPT charge wholly or partially’, the company may become liable for both a corporation tax inaccuracy penalty and a DPT failure to notify penalty based on the same profit. In these cases, HMRC uses the larger of the penalties as the basis of for the penalty calculation.

Diverted Profits Tax: guidance is here

Report by James Bunney


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