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This publication is available at https://www.gov.uk/government/publications/transfer-pricing-and-diverted-profits-tax-statistics-to-2018-to-2019/tackling-profit-diversion-by-multinational-companies
HMRC’s work to make sure that multinational companies pay the right amount of tax in the UK has secured more than £5 billion1 since new measures were introduced in 2015.
This factsheet explains more about our work using the Diverted Profits Tax (DPT) which was introduced by the government in 2015. It coincides with the publication of the Transfer Pricing and DPT statistics for 2018 to 2019.
- DPT was introduced specifically to change behaviour – only being levied where businesses aren’t paying the right tax in other areas, principally Corporation Tax (CT)
- DPT has revolutionised our approach in countering contrived arrangements used by some multinational corporations to shift their profits offshore and avoid paying tax in the UK on their economic activities here
we’ve seen increases in both CT and VAT as DPT starts to have an impact as a behaviour change tool, with the amount of DPT receipts beginning to fall away
- to the end of the 2018 to 2019 tax year over £4.6 billion had been secured - this includes:
- £2 billion in VAT from businesses restructuring their operations
- more than £2.2 billion in CT where DPT helped settle existing investigations
- £369 million net from DPT charging notices
- as at the end of December 2019 HMRC has secured another £480 million through DPT investigations
- HMRC are currently carrying out around 100 investigations into multinationals with arrangements to divert profits - the total amount of tax under consideration was £2.9 billion as at March 2019
- 2018 to 2019 alone saw restructurings that will increase VAT billed through UK companies by around £1.8 billion
- in 2018 to 2019 we secured more than half a billion in additional CT from diverted profits investigations
- in 2019 HMRC launched a new Profit Diversion Compliance Facility to encourage businesses to stop diverting profits and pay what is due - around two thirds of the large businesses initially targeted have decided to use the facility to bring their tax affairs up to date quickly and efficiently, enabling HMRC to focus even more resources on investigating businesses which continue to divert profits
- the 2,000 largest and most complex businesses in the UK are responsible for around 40% of the country’s tax receipts - in 2018 to 2019 this was £251 billion
- in 2018 to 2019 where HMRC stepped in to ensure the correct tax was paid, this secured over £10 billion in additional tax revenue from the largest and most complex businesses, more than ever before - this is money that would have otherwise gone unpaid
The Diverted Profits Tax
HMRC has led the way internationally in making sure that multinational companies pay the right amount of tax on those profits arising from their economic activities in the UK. And we continue to explore other options on a multilateral basis for example through the OECD’s Task Force on the Digital Economy.
In April 2015 the UK government introduced the Diverted Profits Tax (DPT).
DPT was designed to help HMRC counter contrived arrangements used by multinational corporations to shift their profits offshore and avoid paying tax in the UK on their economic activities here.
These arrangements may include:
- avoiding a UK taxable presence (exploiting permanent establishment rules)
- creating tax advantages by using transactions or connected entities that lack economic substance (inflating expenses and understating income)
DPT is targeted at these arrangements and behaviours rather than at specific taxpayers. HMRC has identified businesses in a variety of sectors which are likely to be diverting profits and consequently are within scope of the DPT.
DPT gives businesses a powerful incentive to withdraw from contrived arrangements. They risk being charged a higher rate of tax (25%) upfront if we find the legislation applies (plus any interest and penalties). It also encourages businesses to provide information about their activities to help agree their transfer pricing with HMRC. Transfer pricing is explained in more detail in the statistics publication.
DPT was intended to drive behavioural change and we’ve seen an increasing number of businesses changing their behaviour, structures and policies. DPT was forecast to bring in between £270 million and £360 million a year from 2016 to 2017, to 2019 to 2020, as well as a small amount in 2015 to 2016. This was both through charging notices and the behaviour change element.
Many groups have worked proactively with HMRC to settle their tax affairs before a DPT charge is raised. This leads to the right amount of UK CT being paid and avoids a potential DPT charge.
Diverted Profits Project
HMRC set up the Diverted Profits Project to lead work across HMRC to ensure that businesses diverting profits are identified and challenged. This includes charging DPT when appropriate.
HMRC has a programme of data profiling and research to identify customers that have features that suggest that they may be diverting profits from the UK.
We recognise some companies have been diligent in reviewing their transfer pricing policies. But some persist with contrived arrangements to divert profits so we’re finding new ways to encourage them to change their behaviour.
The Profit Diversion Compliance Facility
We’re continuing the ongoing programme of investigations into potentially contrived arrangements. But we’re also continuing to bolster our resources and innovate to challenge aggressive tax-planning techniques.
In January 2019 we launched a new compliance facility – the Profit Diversion Compliance Facility (PDCF).
We’re calling for multinational businesses to read our guidance, review their tax affairs and, where applicable, use the facility to disclose any additional UK tax liabilities from the past. We’re encouraging them to make proposals to pay any additional tax due on the diverted profits, and if applicable, any interest or penalties owed.
We’re identifying and writing to specific businesses we believe could be diverting money away from the UK.
We’ve seen an encouraging start to this work. Results so far include:
- around two thirds of the large businesses we have written to so far have registered to use the facility
- some businesses that have not received a letter from us have taken the opportunity put their tax affairs on a better footing and have registered to use the facility
- we have received some excellent feedback on the process
- we are following-up with businesses which decided not to register, including starting investigations
The PDCF will enable HMRC to focus even more resources on those businesses who continue to use contrived arrangements to divert profits from the UK.
When investigating arrangements to divert profits HMRC considers relevant accounting periods before and after DPT was introduced. Most of these investigations are resolved by the business agreeing to change its transfer pricing and pay additional CT.
The DPT is having a major impact in encouraging cooperation with HMRC investigations and facilitating DTP settlements, with many businesses choosing to change their behaviour and pay CT on their economic activities in the UK rather than pay tax at a higher rate. The net DPT tax received is reported separately in the transfer pricing and DPT statistics. However, the DPT and the work of the Diverted Profits Project has also had a wider impact.
Our results to 31 March 2019 are:
- the introduction of DPT in 2015 has directly brought in an additional £369 million for taxpayers directly from Diverted Profits Tax
- DPT has helped HMRC to settle over 50 investigations for additional CT - this yield is included in HMRC’s published statistics for additional CT from adjustments to transfer pricing2
- business restructuring (as a result of investigations or the introduction of DPT) has led to additional VAT of nearly £2 billion
- in 2018 to 2019 HMRC issued 203 DPT preliminary notices to 11 businesses and 204 DPT charging notices to 13 businesses3
A year-by-year breakdown of the Diverted Profits Project results since formation in 2015 to 2016 are as follows:
|Net DPT from Charging Notices||-||£138m||£219m||£12m|
|Additional CT from settled investigations of arrangements within the scope of DPT||£379m||£336m||£968m||£548m|
|Additional VAT from business restructuring||-||-||£193m||£1,777m|
Net DPT is the difference between DPT charged and DPT refunded. DPT may be repaid where a company increases its CT self-assessment during the Review Period (now 15 months). In 2018 to 2019 HMRC received £179 million from DPT charging notices and refunded £167 million charged in prior years (and therefore often to different businesses).
HMRC is currently carrying out around 100 investigations into multinationals with arrangements to divert profits. The total amount of tax under consideration as part of these was £2.9 billion (March 2019).4 Since the beginning of the Diverted Profits Project, the great majority of our concluded investigations have resulted in additional tax being payable – generally due to changes in transfer pricing policies or changing structures.
The additional CT and VAT secured refers to where the business has agreed to stop diverting profits and calculate its profits for CT differently leading to additional CT for the past and the future, and following any restructuring, additional VAT arises and will be billed through UK companies. It therefore refers to a wider span of years than the years covered by the DPT policy measure.
HMRC is litigating various disputes where the business was not prepared to change their arrangements and pay additional CT. There are also a number of Diverted Profits cases under civil or criminal investigation with HMRC’s Fraud Investigation Service.
As reported in the technical note published last year in 2018 to 2019 HMRC updated how Future Revenue Benefit (FRB) is reported in line with the NAO’s recommendation such that FRB included in HMRC Annual Report and Accounts is reported in the year in which it has an impact on Exchequer receipts rather than the year in which we complete the compliance intervention.
However, as this document covers the impact of the DPT legislation over a number of years, the total figures used throughout this document include all cash collected and the total FRB based on old reporting methodology.
The change to reporting in HRMC Annual Report and Accounts in 2018 to 2019 has no impact on the total FRB that we score, only the year in which we score it. Therefore, the cumulative totals in this document represent the overall amounts secured as a result of the DPT legislation although some of this will only score as compliance yield in future years. ↩
More than 60 investigations to December 2019 with additional CT of over £2.2 billion ↩
Where HMRC believes that DPT may be due, a preliminary notice is issued. Depending on the company’s response, HMRC may then issue a charging notice setting out the amount of DPT to be paid by the company within 30 days. ↩
Tax under consideration is an estimate of the maximum potential additional tax liability in each case before we have carried out a full investigation of the specific facts or analysis of relevant law. It is not actual tax either owed or unpaid, it is a tool to guide our enquiries to focus on the most significant risks that exist at any particular time with the largest businesses. In many cases, when we have looked at the full facts, it becomes clear that there is some lesser liability or even no further liability at all. Tax under consideration will naturally vary from time to time as outstanding issues are settled and new risks are identified. ↩