The UK budget proposals for 2015 are to be announced on 18 March 2015, following which the Finance Bill 2015 will be published. One of the most important tax provisions to be introduced in 2015 will be the diverted profits tax which is to apply from 1 April 2015. The draft legislation was published at the time of the autumn statement. The diverted profits tax will be charged at a rate of 25% on the amount of diverted profits relating to the UK activities.

The diverted profits tax will apply in two situations. One is where a foreign business has made arrangements to exploit the UK permanent establishment rules and is thereby avoiding becoming subject to UK tax. The second situation is where entities with a presence in the UK are creating tax advantages by making use of entities or transactions that do not have any economic substance. The general objective of the legislation is therefore to prevent profit shifting and erosion of the UK tax base through artificial arrangements.

The first rule in respect of avoidance of a UK permanent establishment will apply where a person or entity has activities in the UK that involve supplies of goods or services by a non-UK resident entity to customers in the UK. The rule will apply where the UK person and the foreign entity are not small or medium enterprises (SMEs) and there will be an exemption where the total sales revenue from supplies of goods and services to UK customers is not more than GBP 10 million in a twelve month accounting period. The tax will not apply to profits that relate only to loan relationships.

The second rules in relation to arrangements without economic substance will apply to entities that have a UK taxable presence and the legislation targets arrangements that exploit mismatches in the taxation of transactions and entities. The diverted profits tax will apply where conditions are met that include an “effective tax mismatch outcome”. This second rule will only apply where the two parties to the arrangements are not SMEs.

Where HMRC considers that the diverted profits tax should apply a preliminary notice will be issued to the entity explaining the issues, the amount of the charge and the way it was calculated. The recipient is given 30 days to respond and then a charging notice will be issued in the original or a revised amount within a further 30 days after that. The charging notice will require payment of the diverted profits tax within 30 days and penalties for late payment would apply. There would be a twelve month review period after the due date for payment following which the charge may be adjusted and the business would have the right to appeal against any further adjustment.