Among the changes announced as part of the Autumn Budget were two sets of proposed amendments to legislation concerning diverted profits tax (DPT), which take effect from 27 October 2021.
The first change reverses the effect of the First-tier Tribunal’s recent decision in Vitol Aviation UK Ltd & others v HMRC [2021] UKFTT 353 (TC), effectively enacting HMRC’s policy on the interaction between DPT charging notices and corporation tax (CT).
The second change is to expressly give effect in UK law to decisions reached in relation to DPT under the mutual agreement procedure (MAP) between two competent authorities under the UK’s double tax treaty network.
Reversing Vitol
In brief summary, in that case the tribunal held that HMRC’s policy – that it would not issue a CT closure notice in relation to an accounting period for which there is an open DPT ‘review period’ – did not constitute reasonable grounds for HMRC refusing to issue a CT closure notice requested by a taxpayer.
The tribunal in Vitol was uncomfortable engaging with HMRC’s policy arguments about how, in HMRC’s view, DPT and CT are ‘supposed’ to interact. HMRC does sometimes have a tendency to substitute its internal ‘policy’ for the law as made by Parliament. The tribunal noted that: ‘many of HMRC’s submissions focused in general terms on the contention that this Tribunal should not disturb HMRC’s policy that it “will not generally issue a full closure notice (or partial closure notice in relation to the arrangement) ... during [the part of a review period in which a company can make amendments to its company 15 tax return]”.’ The tribunal correctly distinguished between the asserted policy of HMRC and the law as enacted by Parliament.
Some might say, rather petulantly, that the government (or rather, in effect, HMRC) is proposing to amend FA 2015 ‘to ensure that the [DPT] legislation functions as intended’. The proposed amendments reverse Vitol by prohibiting HMRC from issuing a closure notice to a company with an open review period, by inserting new s 101C into FA 2015, even if the tribunal has directed that a closure notice should be issued.
A related proposed change is to give immediate effect to any amendment made by a taxpayer to its CT return during the DPT review period, rather than at the end of the enquiry (as is the default position). This is intended to incentivise taxpayers to ‘settle’ the DPT enquiry by increasing their profits chargeable to CT, and therefore eliminating the charge to DPT on those profits.
Taken together, these changes leave the taxpayer hemmed in by the draconian pay upfront nature of DPT and the ease with which HMRC can persuade the government to overturn by legislation even mildly taxpayer-friendly tribunal decisions.
A MAP muddle
A MAP is the process by which two competent authorities reach an agreement as to the application of the relevant double tax treaty to a particular taxpayer. It is HMRC’s view that: ‘As a separate and distinct tax [to CT] DPT is outside of double taxation treaties. Also, DPT is targeted at contrived tax avoidance arrangements which seek to abuse the provisions of the United Kingdom’s tax treaties, so there would be no obligation to give relief under a double taxation treaty for such arrangements’ (INTM489878).
There are two main problems with this statement.
First, whether or not DPT is a ‘separate and distinct’ tax to CT, the UK’s treaties apply to CT and to ‘any identical or substantially similar taxes’ (article 2(2) of the UK/Swiss treaty, for example). DPT, as the Vitol case and amendments discussed above show, works hand-in-hand with CT and is charged on the same ‘taxed profits’ (FA 1015 s 100) as CT. There is a good argument that DPT is within the scope of the UK’s treaties, and other tax authorities are known to take that view.
Second, HMRC has asserted since DPT’s introduction that DPT is ‘targeted at contrived’ tax avoidance arrangements. As many taxpayers will be aware, the term ‘contrived’ (or similar terms) appears nowhere in FA 2015, nor is there any requirement for a taxpayer to have a tax avoidance motive before a DPT charge can arrive.
Pausing there, it might seem strange that the government is proposing to amend the Taxation (International and Other) Provisions Act (TIOPA) 2010 to allow relief against DPT ‘to be given where that is necessary to give effect to a decision reached in MAP’, given that MAP is a process intended to avoid ‘taxation which is not in accordance’ with the treaty (article 25(2) of the 2017 OECD Model Taxation Convention).
The policy announcement provides little context on why this change is being made. HMRC is known to be in MAP with other tax authorities in numerous transfer pricing cases, many of which will also have a DPT element. Perhaps a MAP decision pertaining to DPT is imminent or expected, and HMRC is worried about how that decision can be given effect. Whatever the cause, expressly legislating to provide for relief from DPT following a treaty process does seem to question HMRC’s position that DPT is outside the scope of the UK’s tax treaties, and may provide some comfort to taxpayers dealing with DPT enquiries that MAP (however slow a process) might provide a shield to the DPT ‘stick’.
Among the changes announced as part of the Autumn Budget were two sets of proposed amendments to legislation concerning diverted profits tax (DPT), which take effect from 27 October 2021.
The first change reverses the effect of the First-tier Tribunal’s recent decision in Vitol Aviation UK Ltd & others v HMRC [2021] UKFTT 353 (TC), effectively enacting HMRC’s policy on the interaction between DPT charging notices and corporation tax (CT).
The second change is to expressly give effect in UK law to decisions reached in relation to DPT under the mutual agreement procedure (MAP) between two competent authorities under the UK’s double tax treaty network.
Reversing Vitol
In brief summary, in that case the tribunal held that HMRC’s policy – that it would not issue a CT closure notice in relation to an accounting period for which there is an open DPT ‘review period’ – did not constitute reasonable grounds for HMRC refusing to issue a CT closure notice requested by a taxpayer.
The tribunal in Vitol was uncomfortable engaging with HMRC’s policy arguments about how, in HMRC’s view, DPT and CT are ‘supposed’ to interact. HMRC does sometimes have a tendency to substitute its internal ‘policy’ for the law as made by Parliament. The tribunal noted that: ‘many of HMRC’s submissions focused in general terms on the contention that this Tribunal should not disturb HMRC’s policy that it “will not generally issue a full closure notice (or partial closure notice in relation to the arrangement) ... during [the part of a review period in which a company can make amendments to its company 15 tax return]”.’ The tribunal correctly distinguished between the asserted policy of HMRC and the law as enacted by Parliament.
Some might say, rather petulantly, that the government (or rather, in effect, HMRC) is proposing to amend FA 2015 ‘to ensure that the [DPT] legislation functions as intended’. The proposed amendments reverse Vitol by prohibiting HMRC from issuing a closure notice to a company with an open review period, by inserting new s 101C into FA 2015, even if the tribunal has directed that a closure notice should be issued.
A related proposed change is to give immediate effect to any amendment made by a taxpayer to its CT return during the DPT review period, rather than at the end of the enquiry (as is the default position). This is intended to incentivise taxpayers to ‘settle’ the DPT enquiry by increasing their profits chargeable to CT, and therefore eliminating the charge to DPT on those profits.
Taken together, these changes leave the taxpayer hemmed in by the draconian pay upfront nature of DPT and the ease with which HMRC can persuade the government to overturn by legislation even mildly taxpayer-friendly tribunal decisions.
A MAP muddle
A MAP is the process by which two competent authorities reach an agreement as to the application of the relevant double tax treaty to a particular taxpayer. It is HMRC’s view that: ‘As a separate and distinct tax [to CT] DPT is outside of double taxation treaties. Also, DPT is targeted at contrived tax avoidance arrangements which seek to abuse the provisions of the United Kingdom’s tax treaties, so there would be no obligation to give relief under a double taxation treaty for such arrangements’ (INTM489878).
There are two main problems with this statement.
First, whether or not DPT is a ‘separate and distinct’ tax to CT, the UK’s treaties apply to CT and to ‘any identical or substantially similar taxes’ (article 2(2) of the UK/Swiss treaty, for example). DPT, as the Vitol case and amendments discussed above show, works hand-in-hand with CT and is charged on the same ‘taxed profits’ (FA 1015 s 100) as CT. There is a good argument that DPT is within the scope of the UK’s treaties, and other tax authorities are known to take that view.
Second, HMRC has asserted since DPT’s introduction that DPT is ‘targeted at contrived’ tax avoidance arrangements. As many taxpayers will be aware, the term ‘contrived’ (or similar terms) appears nowhere in FA 2015, nor is there any requirement for a taxpayer to have a tax avoidance motive before a DPT charge can arrive.
Pausing there, it might seem strange that the government is proposing to amend the Taxation (International and Other) Provisions Act (TIOPA) 2010 to allow relief against DPT ‘to be given where that is necessary to give effect to a decision reached in MAP’, given that MAP is a process intended to avoid ‘taxation which is not in accordance’ with the treaty (article 25(2) of the 2017 OECD Model Taxation Convention).
The policy announcement provides little context on why this change is being made. HMRC is known to be in MAP with other tax authorities in numerous transfer pricing cases, many of which will also have a DPT element. Perhaps a MAP decision pertaining to DPT is imminent or expected, and HMRC is worried about how that decision can be given effect. Whatever the cause, expressly legislating to provide for relief from DPT following a treaty process does seem to question HMRC’s position that DPT is outside the scope of the UK’s tax treaties, and may provide some comfort to taxpayers dealing with DPT enquiries that MAP (however slow a process) might provide a shield to the DPT ‘stick’.
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