DPT ― entities or transactions lacking economic substance

By Tolley in association with Paul Bowes
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The following Corporation Tax guidance note by Tolley in association with Paul Bowes provides comprehensive and up to date tax information covering:

  • DPT ― entities or transactions lacking economic substance
  • UK companies ― involvement of entities or transactions lacking economic substance (FA 2015, s 80 cases)
  • Non-UK companies ― involvement of entities or transactions lacking economic substance (FA 2015, s 81 cases)
  • Next steps

This note has been updated for HMRC’s guidance  published in December 2018, which supersedes HMRC’s interim guidance published in March 2015 and updated in November 2015.

A charge to diverted profits tax (DPT) for an accounting period can arise if one or more of the following three scenarios apply:

  • a UK company uses entities or transactions which lack economic substance (FA 2015, s 80)
  • a non-UK company uses entities or transactions which lack economic substance (FA 2015, s 81)
  • a non-UK company avoids creating a UK permanent establishment (PE) (FA 2015, s 86)

FA 2015, s 77(2)

This guidance note sets out details of the charge to DPT in respect of the first two scenarios. More detailed examples of section 80 and section 81 cases can be found in HMRC’s guidance at DPT1300+ , including the application to particular types of assets and industries.

See the DPT ― avoidance of UK permanent establishment guidance note for details of the charge arising in the third scenario.

FA 2015, ss 80 and 81 are an extension of the UK transfer pricing provisions in situations where profits are diverted from a company with a UK corporation tax presence, to related persons (related by the ‘participation condition’ set out below), that give rise to a significant tax reduction as defined under the DPT legislation (using the ‘80% payment test’ ― see below). The related persons can be based either in the UK, by being resident or by having a PE in the UK (broadly in circumstances where advantageous UK tax arrangements apply), or outside the UK. Like the UK transfer pricing rules, reference is made to provision (the ‘material provision’) made or imposed between two persons (in the case of DPT, a company and another person) by

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