Diverted Profits Tax

With effect from this April, foreign companies selling to customers in the UK will be liable for UK tax on profits. Termed as Diverted Profits Tax the proposed tax is designed to capture those companies seeking to reduce their tax liability by moving profits into a foreign domiciled company.

Whilst the chancellor has suggested that the new Tax will increase tax revenue by £300m per annum, we believe this is a conservative figure and the new tax has potential to increase revenue by substantially more, but there are some concerns.

Aimed at large companies that are using so called, 'tax avoidance schemes', the government has come under increasing pressure to act, but there are question marks over the legitimacy of the rate of tax at 25% of profits, as opposed to using the standard corporation tax rate which is lower. There is also the likelihood that the tax will face a number of legal challenges from some organisations, with very deep pockets, the future will be an interesting one for the new tax and one should expect it to take up many column inches in the press over the coming years.

When a tax like this is brought into force the majority opinion of the general public is that the companies trying to avoid tax, however legitimate, should pay up and it is a good thing when any loophole is closed and any corporation mounting a legal action against paying the tax will therefore face a consumer backlash, or so you would think, but that has not always been the case in the past, for corporations such as Google and recently Apple, consumers are not so willing to stick to their principles if the product is good enough, for example the record breaking profits from the iPhone 6.

The debate will also rage about the number of valuable jobs these companies bring to the UK and in turn the tax revenue these jobs produce, so maybe it's best not to rock the boat? We shall see.

Overall we feel that the new tax is a good thing but one should question the rate of tax as we feel it should be in line with corporation tax and believe that the Bill needs greater clarity overall. Consideration also needs to be given, by the government, to the potential administrative cost in collecting this tax as it could be disproportionate to the amount of revenue.

As a result of media pressure, one would have thought that the new tax would focus on technology companies, but it does not, companies such as property investment companies may also be liable, among others. This lack of clarity may compound the administrative burden and cloud the HMRCs focus on collecting the tax that, coupled with the fact that the Tax is not a self-assessed tax, brings a whole heap of work to do, which is costly.

Because of the way the tax guidelines are structured, it would seem that almost all foreign companies would be included and it would be up to those companies to advise HMRC that a Diverted Profits Tax charge may be liable.

So is it practical? Maybe not
Will it work? We will see
Is it a vote winner? Absolutely

It is a start, so expect revisions and greater clarity over the coming months.

For more information please go to gov.uk website and search Diverted Profits Tax