The government’s new Diverted Profits Tax (DPT), commonly known as the ‘Google tax’, formally came into force on 1st April. Detailed initially during the 2014 Autumn Statement, the tax is an attempt by the government to stop large firms from paying comparatively small amounts of tax in the UK by ‘diverting’ their profits to be reported overseas.
A commonly referenced example of this sort of arrangement is search engine giant, Google, who reported UK revenues of £3.4 billion in 2013/14, but paid just £20.4 million in UK corporation tax. This was because of an arrangement known as a ‘Double Irish’ structure, which sees Google collect profits in Ireland before shifting them again to Google Ireland Holdings, which is Dublin-registered but based in Bermuda for tax purposes.
DPT will be charged at 25% and HMRC will have the power to estimate the amount of diverted profits, before issuing a 30 day notice on the tax due. In an effort to streamline the system and ensure the tax is collected, HMRC will collect the tax first and allow appeals later. The expectation is that the first charging notices will be sent out at some point around September 2015.
For most SME businesses, the new DPT is unlikely to have much of a visible effect. However, some concerns have been raised by industry observers that, because of the extraordinary scope of DPT, HMRC could choose to widen its application. Even if HMRC do not proactively pursue this route, there is still the potential that some businesses could be inadvertently sucked in to DPT, where otherwise they did not believe themselves to have a liability.
A commonly considered example of this sort of event could include a UK company who does business with a foreign affiliate and, in doing so, reduces its UK taxable profits. This scenario is perhaps not as rare as it may first seem and, although HMRC have stated that DPT should only impact ‘contrived arrangements’, it remains possible that smaller businesses could be sucked into assessing their DPT liability in the near future.