Diverted Profits Tax

Draft legislation has just been released  for the diverted profits tax, which was recently announced in the Autumn Statement 2014


Effective date

The new rules will be effective in respect of profits arising on or after 1 April 2015.

1st Rule

The first rule is designed to address arrangements which avoid a UK permanent establishment (PE) and comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided that the detailed conditions are met.

This only applies where the UK person and foreign company are not small or medium-sized enterprises (SMEs).:

Maximum number of staff And less than one of the following limits: Annual turnover Balance sheet total
Small Enterprise 50 €10 million €10 million
Medium Enterprise 250 €50 million €43 million 

There will also be an exemption based on the level of the foreign company’s (or a connected company’s) total sales revenues from all supplies of goods and services to UK customers not exceeding £10 million for a twelve month accounting period.

2nd Rule

The second rule will apply to certain arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome” are met.

This only applies where the two parties to the arrangements are not SMEs (the SME test will apply to the group).


For more details, please look at the pdfs at the link above, or get in touch with us if you need advice.

By Mohammed Haque

Mohammed is a chartered accountant (ICAEW) with many years of experience in dealing with complex audit, accounting and tax matters.

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