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This publication is available at https://www.gov.uk/government/publications/diverted-profits-tax-yield-methodological-note/diverted-profits-tax-yield-methodological-note
This note explains how outturn yield is estimated for the Diverted Profits Tax (DPT).
The DPT was introduced in the UK on 1 April 2015 to address tax avoidance by Multinational Enterprises. The DPT is designed to encourage large businesses to change behaviours that are aimed at minimising tax liabilities through the use of contrived arrangements, or they will face paying tax at a higher rate (25%) than the Corporation Tax rate (19%). It is not targeted specifically at any particular sectors or companies, rather at particular behaviours and arrangements.
2. Yield from the Diverted Profits Tax
The DPT yield figures given in the Transfer Pricing and Diverted Profits Tax statistics include amounts received as a result of DPT charging notices issued by HMRC, and additional amounts of Corporation Tax (CT) collected from businesses which have changed their behaviour because of the introduction of DPT. For example, of the £388 million collected in 2017 to 2018, £219 million was collected through DPT charging notices and £169 million through behavioural change.
In this context, ‘behavioural change’ refers to measures undertaken by businesses to ensure a fair proportion of their profits are declared and taxed in the UK, so that they fall out of scope of the DPT. For example, businesses may make transfer pricing adjustments, or restructure to ensure that profits from the development or exploitation of Intellectual Property carried out in the UK are taxable in the UK.
Behavioural change can be divided in 2 types. First, some businesses change their behaviour because of HMRC compliance activity, for example an inquiry into a business’s tax affairs. Second, some businesses change their behaviour in response to the introduction of the DPT, but without targeted HMRC compliance activity; this is referred to as ‘spontaneous behavioural change‘. In general, the majority of the additional CT is a result of HMRC compliance activity rather than spontaneous behavioural change.
Amounts collected through DPT charging notices are monitored by HMRC. Additional CT from behavioural change linked to HMRC compliance activity is also monitored and scored when there is clear evidence that the behavioural change is related to the introduction of DPT. As a result there is a high level of certainty around those elements of the yield. However, additional CT collected as a consequence of spontaneous behavioural change is not observed directly. The work carried out to estimate this is outlined below.
3. Additional Corporation Tax collected due to spontaneous behavioural change
To estimate additional CT collected as a result of spontaneous behavioural change by businesses, HMRC analyses CT receipts of businesses considered ‘high risk’ by HMRC’s Diverted Profits Project. This analysis has uncovered a number of businesses where CT receipts have increased significantly since the introduction of the DPT.
The cases highlighted by the analysis, as well as other companies identified by the Diverted Profits Project that were likely to have changed their behaviour, undergo detailed review by HMRC Customer Compliance Managers who have expert insight into the tax affairs of large businesses. This exercise has confirmed that a number of these businesses have spontaneously changed their behaviour and that additional CT has been collected from these businesses as a result.
4. Changes to methodology
When this analysis was carried out previously, operational evidence suggested more businesses than those identified by HMRC had changed their behaviour. Therefore, the 2015 to 2016 and 2016 to 2017 figures of additional CT liabilities from the identified cases were grossed up to account for any unknown cases. This was done using the same methodology as in the exchequer costing for the DPT which was produced for the Autumn Statement 2014 and certified by the Office for Budget Responsibility and resulted in only a small adjustment to the final figures.
The scope of this analysis was subsequently expanded and HMRC is now confident that it can identify all cases of spontaneous behavioural change, so no grossing up was applied to the 2017 to 2018 figure. Table 1 below compares the yield estimates for 2015 to 2016 and 2016 to 2017 using the previous methodology (with grossing up) and the current methodology (without grossing up). The total yield from the 2 approaches is very similar despite the uncertainty around the factor used previously to gross up the estimates.
4.1 Table 1: comparison of outputs using the previous and current methodologies
|Yield, £ million||2015/16||2016/17|
5. Future work
HMRC will continue to monitor and report yield from the DPT on an annual basis. The intention is that the methodological approach to estimating yield from behavioural change will remain as described above. If the methodological approach changes for whatever reason an updated note will be provided.