MTT31100 - Calculating top-up amounts: Calculating the top-up amount of an entity - Domestic Top-up Tax
The mechanism for allocating the top-up amount of a territory to each member is different for DTT compared to MTT. This alternate method allocates amounts to members in proportion to their respective contributions to the total top-up amount for the territory.
Under the DTT mechanism, top-up amounts are allocated based on the effective tax rate of each profit-making entity. The MTT mechanism allocates top-up amounts based on the adjusted profits of each entity.
The DTT mechanism is set out in section 272 Finance (No.2) Act 2023, which substitutes section 193 of the Act for DTT purposes.
See MTT65020+ for further guidance on chargeability in DTT.
Election to make one member liable
A group may elect to make one member liable for DTT. Where this election is made, there will be no need to allocate top-up amounts between group members. See MTT65040 for further guidance.
Introduction by Finance Act 2025
This provision was inserted into F(No.2)A23 by FA25. This guidance page is not applicable for periods beginning before 31 December 2024 unless the retrospection election is made (see MTT09490).
For those prior periods, where no election is made, the ordinary MTT mechanism is used to determine the top-up amounts of members for DTT purposes.
Allocation mechanism
The top-up amount of a standard member of a group is determined by a nine-step process.
Step 1: Determine the total top-up amount for the standard members of a group, which is the sum of the top-up amounts and additional top-up amounts of:
- the standard members, and
- any investment entities.
Step 2: For each standard member determine the adjusted profits and covered tax balance.
Step 3: For each standard member with positive adjusted profits, determine the effective tax rate by dividing its covered tax balance by its adjusted profits.
Step 4: For each standard member of the group whose effective tax rate is below 15%, determine its top-up tax percentage. This is found by subtracting the member’s effective tax rate from 15%.
Step 5: For each such standard member, calculate an allocation key amount by multiplying:
- the member’s top-up tax percentage
by
- the member’s adjusted profits.
Step 6: Determine the group allocation key amount, which is the sum of the allocation key amounts determined in step 5.
Step 7: Determine the allocation key ratio for each member by dividing:
- the member’s allocation key amount (the product of step 5)
by
- the group allocation key amount (the product of step 6).
Step 8: Determine each member’s top-up amount by multiplying:
- the total top-up amount of the group (step 1)
by
- the member’s allocation key ratio (step 7).
Step 9: If none of the standard members has a positive adjusted profits, or none of them has an effective tax rate below 15%, the total top-up amount (the product of step 1) is divided equally between the standard members.
Calculating the top-up amount of a single entity
The top-up amount of a single entity is the sum of any top-up amount and additional top-up amounts of the entity for the period.
Investment entities
For DTT purposes, the top-up amounts of investment entities are to be included in the total top-up amount for a territory (the product of step 1) when calculating the top-up amount of the standard members.
Where:
- the standard members do not have any top-up amounts or additional top-up amounts, and
- there is a total top-up amount as the result of amounts attributed from investment entities,
the total top-up amount will be divided evenly between the standard members of the group, in accordance with section 272(11) of the Act.
See MTT45210 for further guidance.
Minority owned subgroup
To determine the top-up amounts of the members of a minority owned subgroup, the same mechanism is applied to the members of that subgroup.
Joint venture group
To determine the top-up amounts of a member of a joint venture group the same mechanism is applied to the joint venture group. This means that joint venture group members will be charged top-up amounts under DTT, where there is a charge for the joint venture group.
See MTT41640 for further guidance of DTT chargeability for joint venture groups.
Example 1
A group has three standard members located in the UK:
- A Ltd has an adjusted profit of £1 million and a covered tax balance of £120,000.
- B Ltd has an adjusted profit of £2 million and a covered tax balance of £180,000.
- C Ltd has an adjusted loss of £100,000 and a covered tax balance of £10,000.
The standard members have top-up amounts of £490,000, and no additional top-up amounts.
The group also has an investment entity with a top-up amount of £10,000 and no additional top-up amounts.
The group does not make a section 271 election.
The top-up tax allocated to each member is determined using the nine-step process.
Step 1: The total top-up amount is £500,000.
Step 2: The adjusted profit and covered tax balance of each member is above.
Step 3: The effective tax rate is 12% for A Ltd and 9% for B Ltd (covered tax balance divided by adjusted profit). We do not need to determine the effective tax rate of C Ltd as it is loss-making. Therefore, C Ltd will have no top-up amount allocated to it.
Step 4: The top-up tax percentage is 3% for A Ltd and 6% for B Ltd (15% minus their respective effective tax rates).
Step 5: The allocation key amount is £30,000 for A Ltd and £120,000 for B Ltd (top-up tax percentage multiplied by adjusted profit).
Step 6: The group allocation key amount is £150,000 (sum of both allocation key amounts in step 5).
Step 7: The allocation key ratio is 0.2 for A Ltd and 0.8 for B Ltd (their respective allocation key amounts divided by the group allocation key amount).
Step 8: The top-up amount is £100,000 for A Ltd and £400,000 for B Ltd (total top-up amount multiplied by their respective allocation key ratios).
Step 9: A Ltd and B Ltd both have positive adjusted profits and so this step does not apply.
The total top-up amount for DTT is allocated as follows:
A Ltd - £100,000
B Ltd - £400,000
C Ltd – nil
Example 2
A group owns a joint venture group. In the UK, the joint venture group has one standard member, two members of a single minority owned subgroup, and no investment entities.
The standard member does not have any top-up amount or additional top-up amount.
The minority owned members, X Ltd and Y Ltd, have a total top-up amount of £1000:
- X Ltd has an adjusted profit of £100,000 and a covered tax balance of £13,000.
- Y Ltd has an adjusted profit of £50,000 and a covered tax balance of negative £1000.
The standard member of the JV group has no top-up amount allocated to it, as the only top-up amount or additional top-up amount relating to the JV group derives from the minority subgroup and the calculation is applied to the minority subgroup separately.
The top-up tax allocated to each member of the minority owned subgroup is determined using the nine-step process.
Step 1: The total top-up amount is £1,000.
Step 2: The adjusted profit and covered tax balance of each member is above.
Step 3: The effective tax rate is 13% for X Ltd and negative 2% for Y Ltd (covered tax balance divided by adjusted profit).
Step 4: The top-up tax percentage is 2% for X Ltd and 17% for Y Ltd (15% minus their respective effective tax rates).
Step 5: The allocation key amount is £2,000 for X Ltd and £8,500 for Y Ltd (top-up tax percentage multiplied by adjusted profit).
Step 6: The group allocation key amount is £10,500 (sum of both allocation key amounts in step 5).
Step 7: The allocation key ratio is 2,000/10,500 for X Ltd and 8,500/10,500 for Y Ltd (their respective allocation key amounts divided by the group allocation key amount).
Step 8: The top-up amount is £190.48 for X Ltd and £809.52 for Y Ltd (total top-up amount multiplied by their respective allocation key ratios).
Step 9: X Ltd and Y Ltd both have positive adjusted profits and so this step does not apply.
The total top-up amount for DTT is allocated as follows:
X Ltd - £190.48
Y Ltd - £809.52