The tax is aimed at countering the use of aggressive tax planning techniques used by large (typically multinational) enterprises to divert profits from the UK resulting in the erosion of the UK tax base.
It is clear that the social housing sector is not a target of this new legislation. However, charities are not excluded and, as the legislation currently stands, could be caught by the wide ranging provisions. The legislation does not exclude UK-UK transactions, although such transactions are also not a target.
The DPT covers two scenarios. The first is concerned with foreign companies with a permanent establishment in the UK. The second scenario looks at companies which are creating tax advantages by undertaking transactions with connected parties that lack economic substance.
On the face of it, this would not appear to be the case with most transactions in social housing groups. However, the legislation does not have the usual anti-avoidance motive test and will catch a transaction if it results in a mismatch where there is a tax deduction in one entity with no corresponding taxable income in another, giving an overall reduction in tax payable. The legislation also states it doesn’t matter if this tax reduction is created by the operation of a relief, the exclusion of any amount from a charge to tax or otherwise.
This would seem to catch a gift aid deduction and its tax-free receipt by the charity.
For the DPT to apply, there would also have to be insufficient economic substance. This is defined as “a comparison of the financial benefit of the tax reduction with any other financial benefit referable to the transaction for the parties taken together”. It is not entirely clear whether a gift aid payment would fall within this wording, but it is difficult to get comfortable that it is not met.
KPMG has submitted representations to HMRC suggesting a change in the legislation to make it clear that charity groups using gift aid payments should be excluded from the 25% charge. Umbrella organisations such as the Charity Tax Group have also submitted representations.
If the legislation is not changed it will be necessary for an entity to notify HMRC in writing within 3 months before the end of the accounting period in which diverted profits may arise. Unlike corporation tax, DPT is not self-assessed; we would expect HMRC not to raise a charge where the statutory gift aid relief is being used appropriately. However, this creates compliance obligations and uncertainty; providers may wish to raise this with their Inspector in advance of notification to seek reassurance.
Update 26 March 2015
Further to the publication of the above article announcements made in the 2015 Budget has had bearing on DTP.
We are pleased to note that government has listened to representations made by us and others and it has decided to exclude gift aid payments from the diverted profits tax legislation.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.