On 28 April 2025, HMRC published a number of policy papers and consultations, many of which related to the UK’s international tax regime. HMRC have stated that the measures ‘will collectively reduce administrative burdens to save taxpayers and traders time, and will increase certainty, allowing businesses to focus on adding value to the economy’.
In particular, HMRC have published draft legislation to abolish diverted profits tax (DPT) as a standalone tax and instead bring its current key features within the UK’s main corporation tax regime. Broadly, DPT is targeted at large multinational enterprises that enter into arrangements to divert profits from the UK by avoiding a UK taxable presence or by other arrangements between connected entities. The proposed changes should simplify the interaction between these rules and other parts of the UK’s corporation tax regime, including transfer pricing as well as bringing the rules within the scope of double tax treaties.
Donald Trump’s dislike of VAT and the UK’s digital services tax has been well reported, but there have also been some reports suggesting that he feels the same way about the UK’s DPT regime. This may mean that reform or abolition of DPT may be necessary to assist negotiations of a UK trade agreement with the US. Whilst the proposed changes should improve certainty for both businesses and HMRC, it is not yet clear whether they will be sufficient to address the Trump regime’s supposed concerns.
HMRC have also proposed a number of changes in relation to the UK’s transfer pricing regime, which broadly requires transactions between connected parties to be recognised on an arm’s length basis for tax purposes.
Historically, the rules have applied where both parties are based in the UK, even though there is generally a lower risk that such transactions are tax motivated. HMRC have now published draft legislation to exempt domestic transactions between UK companies from the transfer pricing rules, where there is no risk of tax loss. This measure is likely to be welcomed by affected businesses.
However, whilst the government gives with one hand, does it take with the other?
HMRC are also consulting on two further changes to the UK’s transfer pricing regime. Firstly, it is proposing to change the scope of the regime. Currently, small and medium-sized businesses are exempt from the rules, although HMRC can bring individual medium-sized businesses within scope by issuing them with a notice. The consultation proposes tweaks to the thresholds that apply to identify a small business and how they are applied for these purposes, but importantly proposes to remove medium-sized enterprises from the exemption entirely. Whilst this arguably increases certainty for those businesses, it may also increase their administrative burden.
The consultation also seeks views on the proposed introduction of a new requirement for in-scope businesses to report information about certain cross-border transactions between related parties to HMRC. Whilst the consultation states that most major economies have a comparable requirement, this is unlikely to provide much solace for those that will see an increase in their tax compliance burden if this proposal is implemented. The government has stated that it intends for this increase to be ‘proportionate’ – time and any safeguards and mitigation resulting from the consultation process will tell whether this is the case.
Finally, draft legislation has also been published that makes a number of technical changes to the UK’s legislation regarding businesses with a ‘permanent establishment’, i.e. a taxable presence in the UK through a branch of a larger overseas entity or via an agent acting on its behalf (‘dependent agent’). The changes are intended to align UK domestic rules on what constitutes a dependent agent more closely with internationally agreed principles.
Overall, we expect that the proposed simplifications regarding DPT and transactions between UK companies will be welcomed by most international businesses. There will be many, however, who are understandably wary of new administrative requirements, following a raft of new measures introduced over the past decade with bespoke compliance regimes.
Paul Minness, RSM UK
On 28 April 2025, HMRC published a number of policy papers and consultations, many of which related to the UK’s international tax regime. HMRC have stated that the measures ‘will collectively reduce administrative burdens to save taxpayers and traders time, and will increase certainty, allowing businesses to focus on adding value to the economy’.
In particular, HMRC have published draft legislation to abolish diverted profits tax (DPT) as a standalone tax and instead bring its current key features within the UK’s main corporation tax regime. Broadly, DPT is targeted at large multinational enterprises that enter into arrangements to divert profits from the UK by avoiding a UK taxable presence or by other arrangements between connected entities. The proposed changes should simplify the interaction between these rules and other parts of the UK’s corporation tax regime, including transfer pricing as well as bringing the rules within the scope of double tax treaties.
Donald Trump’s dislike of VAT and the UK’s digital services tax has been well reported, but there have also been some reports suggesting that he feels the same way about the UK’s DPT regime. This may mean that reform or abolition of DPT may be necessary to assist negotiations of a UK trade agreement with the US. Whilst the proposed changes should improve certainty for both businesses and HMRC, it is not yet clear whether they will be sufficient to address the Trump regime’s supposed concerns.
HMRC have also proposed a number of changes in relation to the UK’s transfer pricing regime, which broadly requires transactions between connected parties to be recognised on an arm’s length basis for tax purposes.
Historically, the rules have applied where both parties are based in the UK, even though there is generally a lower risk that such transactions are tax motivated. HMRC have now published draft legislation to exempt domestic transactions between UK companies from the transfer pricing rules, where there is no risk of tax loss. This measure is likely to be welcomed by affected businesses.
However, whilst the government gives with one hand, does it take with the other?
HMRC are also consulting on two further changes to the UK’s transfer pricing regime. Firstly, it is proposing to change the scope of the regime. Currently, small and medium-sized businesses are exempt from the rules, although HMRC can bring individual medium-sized businesses within scope by issuing them with a notice. The consultation proposes tweaks to the thresholds that apply to identify a small business and how they are applied for these purposes, but importantly proposes to remove medium-sized enterprises from the exemption entirely. Whilst this arguably increases certainty for those businesses, it may also increase their administrative burden.
The consultation also seeks views on the proposed introduction of a new requirement for in-scope businesses to report information about certain cross-border transactions between related parties to HMRC. Whilst the consultation states that most major economies have a comparable requirement, this is unlikely to provide much solace for those that will see an increase in their tax compliance burden if this proposal is implemented. The government has stated that it intends for this increase to be ‘proportionate’ – time and any safeguards and mitigation resulting from the consultation process will tell whether this is the case.
Finally, draft legislation has also been published that makes a number of technical changes to the UK’s legislation regarding businesses with a ‘permanent establishment’, i.e. a taxable presence in the UK through a branch of a larger overseas entity or via an agent acting on its behalf (‘dependent agent’). The changes are intended to align UK domestic rules on what constitutes a dependent agent more closely with internationally agreed principles.
Overall, we expect that the proposed simplifications regarding DPT and transactions between UK companies will be welcomed by most international businesses. There will be many, however, who are understandably wary of new administrative requirements, following a raft of new measures introduced over the past decade with bespoke compliance regimes.
Paul Minness, RSM UK
