Diverted Profits Tax

The Diverted Profits Tax (DPT) came into force on 1 April 2015. The DPT is an anti-avoidance measure that targets large multinational businesses that the government deem to be using contrived and artificial arrangements to divert profits overseasthereby paying less or no tax in the UK.

The DPT has been coined as the ‘google tax’ but the net is spread much wider than just technology companies. Companies that may fall within the tax charge will be spread across many industries. The tax rules have been drafted to exclude small and medium sized companies but multinationals could face the DPT at a rate of 25%.

Earlier this month, Diageo a FTSE 100 company issued a press release stating that it had been discussing its transfer pricing position and related issues with HMRC. Whilst these discussions were ongoing, Diageo was notified that HMRC intends to issue preliminary notices of assessment under the DPT regime. Diageo does not believe it is within the scope of the DPT and will fight this claim. However, under the legislation, the company is required to pay the enormous sum of £107 million demanded by HMRC up front and only then are they able to enter into discussions of whether this was justified.

It is expected to be at least a year before a resolution is reached although Diageo considers no provision is required in relation to the DPT. It will be interesting to see how this case develops and if any other company’s tax affairs are publicised in this way. HMRC refused to comment on the case.

As part of the Autumn Statement measures, the Chancellor announced the introduction of a new Diverted Profits Tax (DPT) to counter the use of aggressive tax planning to avoid paying tax in the UK. The DPT has been coined as the‘google tax’ but the net is spread much wider than technology companies. Companies that may fall within the tax charge will be spread across many industries. The new tax rules have been drafted to exclude small and medium sized companies.

Where multinationals use artificial arrangements to divert profits overseas in order to avoid UK tax, the DPT will be applied at a rate of 25% from 1 April 2015.

The charge will arise if either of two rules apply:

  • The first rule is designed to address arrangements which avoid a UK Permanent Establishment (PE) and comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided detailed conditions are met.
  • The second rule will apply to arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome” are met.

A charging notice issued by HMRC will require the payment of the diverted profits tax within 30 days and penalties will apply for late payment.

The introduction of the DPT was the subject of a recent Commons Debate. A number of issues were raised concerning the interaction of the DPT and the OECD’s work on Base Erosion and Profit Shifting (BEPS). There were also concerns on the speed at which the DPT is being introduced and the relatively low level of tax that will be raised given the scale of the issue.

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Case Studies

The Tax Man

Minimise the stress of an investigation and make use of our extensive experience in securing best outcome for our clients

Business Valuation in Distress

Take advantage of our impartial and rigorous due diligence procedures

FD in The Cupboard

Our innovative ideas are here to improve your business performance and secure appropriate and cost effective funding

The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.