Change to the Diverted Profits Tax rate from 1 April 2023
Published 3 March 2021
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Who is likely to be affected
Large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK by either avoiding a UK taxable presence or by other arrangements, or both, between connected entities designed to divert profits from the UK.
General description of the measure
This measure will increase the rate of Diverted Profits Tax from the current rate of 25% to 31% from 1 April 2023, in order to maintain the current differential between the Diverted Profits Tax rate and the Corporation Tax rate.
The rate of Diverted Profits Tax charged on diverted profits which are ring-fence profits or notional ring-fence profits remains unchanged at 55%. The rate of Diverted Profits Tax charged on taxable diverted profits which would have been subject to the bank surcharge remains unchanged at 33%.
Policy objective
This rate change will support the main policy objective of Diverted Profits Tax to discourage use of contrived arrangements that result in the erosion of the UK tax base.
Background to the measure
This measure was announced at Budget 2021 forming part of an overall package with the changes to the Corporation Tax rate and other ancillary changes. With the main rate of Corporation Tax set at 25% for Financial Year beginning 1 April 2023, it is necessary to increase the rate of Diverted Profits Tax in order to maintain the current differential and discourage the diversion of profits from the UK.
Detailed proposal
Operative date
This measure will have effect in respect of profits arising on or after 1 April 2023.
Current law
Companies engaging in the diversion of profits from the UK which meet the conditions for the Diverted Profits Tax to apply are subject to the legislation at:
- Part 3 Finance Act 2015
- Schedule 6 Finance Act 2019
Proposed revisions
Legislation will be introduced in Finance Bill 2021 to amend the Diverted Profits Tax legislation to increase the rate to 31% along with apportionment provisions for accounting periods straddling the commencement date.
Summary of impacts
Exchequer impact (£million)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| – | – | – | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer but has an important role in protecting the UK’s corporation tax base.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects large multinational businesses. There is no expected to impact of family formation, stability or breakdown.
Equalities impacts
This measure will only impact large multinational enterprises, and therefore it is not anticipated that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to impact the limited number businesses that meet the conditions for Diverted Profits Tax to apply. This measure will increase the rate of Diverted Profits Tax from the current rate of 25% to 31% in order to maintain the current differential between the Diverted Profits Tax rate and the Corporation Tax rate. One-off costs will include familiarisation with this change. There are not expected to be any continuing costs. Customer experience is expected to remain broadly the same as this measure does not alter how businesses interact with HMRC. There is expected to be no impact on civil society organisations.
Operational impact
There are no operational costs associated with the delivery of this policy.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
HMRC already has extensive procedures in place for the monitoring and evaluation of compliance yield, including specific publications in relation to Diverted Profits Tax. It is anticipated that this measure can be monitored and evaluated as part of this pre-existing process.
Further advice
If you have any questions about this change, send an email to: divertedprofits.mailbox@hmrc.gov.uk.