COVID-19 and Diverted Profits Tax investigations

With HMRC reportedly suspending civil investigations as a result of the COVID-19 pandemic, what steps should those taxpayers currently under or at risk of a Diverted Profits Tax ("DPT") investigation be taking now?

It has been widely reported that HMRC have adopted a new approach in relation to civil investigations in light of the COVID-19 pandemic.  Although not formally announced, we have seen HMRC writing to certain taxpayers to acknowledge that they are being instructed to suspend investigation activity in some cases.

DPT investigations are a particularly burdensome and relatively new form of investigation.  Multinational businesses deemed to be "high risk" by HMRC now face forensic, evidence-based investigations involving extensive information requests, employee interviews and email reviews in order to support their existing transfer pricing arrangements and, unless proper care is taken, these investigations can become burdensome and quickly spiral out of control.  Those taxpayers currently under or at risk of an investigation would be well-advised to use any brief hiatus to ensure they are on the front foot when HMRC resumes investigation activity.


In 2015, following a series of high-profile cases and increased public pressure to clamp down on aggressive tax structures, the UK Government decided to take unilateral action (ahead of the release of the final OECD BEPS report) through the introduction of DPT (commonly dubbed the "Google Tax").

The primary objective of DPT is, in short, to ensure that profits taxed in the UK fully reflect the economic activity carried out in the UK.  Applying to profits arising from 1 April 2015, DPT aims to deter and counteract the diversion of profits from the UK by multinational groups that either:

  • seek to avoid creating a UK permanent establishment that would bring a non-UK company within the charge to UK corporation tax; or
  • use arrangements or entities lacking in economic substance to exploit tax mismatches either through expenditure or the diversion of income within the group.

DPT is a separate tax from UK corporation tax and is set at a higher rate (with taxable diverted profits charged at a main rate of 25%).  Unlike corporation tax, DPT is technically not self-assessed – however, companies have a duty to notify HMRC if they are potentially within the scope of DPT within three months after the end of the relevant accounting period or face penalties.

DPT is brought into charge by HMRC issuing a "Charging Notice".  Prior to this, HMRC must issue a "preliminary" notice to set out how the charge has been calculated and taxpayers have 30 days to make representations (although the representations that HMRC are permitted to consider are limited).  Once a Charging Notice has been issued, the tax must be paid within 30 days (with no postponement on any grounds), after which there is a 15-month period in which HMRC may review the Charging Notice.  DPT is, therefore, paid up-front.

Despite the introduction of DPT in 2015, HMRC believe that many multinational groups are still not paying the correct amount of UK tax as a result of profit diversion.  Aside from deliberate behaviour, this may arise as a result of outdated transfer pricing policies or businesses simply not being aware of a problem.  In response, the Profit Diversion Compliance Facility (the "PDCF") was introduced in January 2019 to allow taxpayers to voluntarily disclose any issues whilst retaining control of any investigation.  Following registration under the PDCF, businesses and their tax advisors were permitted to conduct a detailed investigation over a period of six months and make a "without prejudice" proposal to HMRC to bring the taxpayer's tax affairs up-to-date (with increased leniency granted by HMRC in terms of penalties).

The time limit for registration under the PDCF ended on 31 December 2019 and, aside from the current coronavirus situation, multinationals should expect HMRC to step up the fight against what they regard as artificial arrangements designed to erode the UK tax base.  HMRC were sending "nudge" letters prior to cut-off date to those businesses potentially at risk and encouraging them to register.  However HMRC were also already launching investigations into certain businesses – and the frequency of investigations should be expected to increase now that the registration window for the PDCF is formally closed.

The investigation

Equipped with increasingly large amounts of information about multinational businesses, HMRC are carrying out risk assessments on businesses potentially within the scope of DPT.  Where a business is considered to be "high risk", HMRC may decide to launch an investigation.  HMRC's stated policy is that it would prefer to work cooperatively with businesses during these investigations and so, as a starting point, HMRC may seek additional information through informal requests.

Informal information requests will likely start with HMRC asking for a range of materials, such as transfer pricing documentation, intercompany agreements, material contracts and internal documents outlining contract approval processes, as well as for details on matters such as IP strategies, product lifecycles, profit and revenue and key employees.  Requests for information will not be limited to UK economic activities in isolation, as HMRC will want to understand the global picture in order to reach a view as to whether a DPT charge arises.  At the same time or following this, HMRC will typically want to conduct interviews with members of senior management and operational staff (with a dozen or more interviews not being uncommon).  Finally, in order to verify and test the information provided in documents and interviews, HMRC are increasingly asking to review emails.  In our experience, HMRC usually ask for at least one month of data from the accounts of several key employees, which can amount to several thousand individual emails.

Simply refusing to provide any information would be inadvisable – businesses determined to be uncooperative should expect HMRC to issue formal information notices or even a preliminary Charging Notice.  However, the burden of proof is on HMRC and HMRC's formal information powers are not unlimited – for example, in a standard enquiry, HMRC do not have the right to interview employees and taxpayers are not required to provide information subject to legal professional privilege, not "reasonably required" or outside their possession/power (e.g., if held by a non-UK entity).    Nevertheless, faced with the threat of a Charging Notice (i.e., because the tax is paid up-front), taxpayers may be inclined to simply hand over information requested by HMRC.  In such circumstances, taxpayers will have effectively ceded all control over the investigation to HMRC, providing only those pieces of information selected by HMRC as important and without proper consideration as to what is being provided.

What should taxpayers do?

Any businesses currently under investigation by HMRC should ensure they have appropriate legal and tax advice.  As a general rule, however, the key task will be to wrest control of an investigation as far as possible from HMRC and ensure that you can set forth your own perspective on the correct tax position.

Given the current pause in investigations, such businesses may wish to use the additional time to gather and review further information of their own regarding their transfer pricing and DPT positions (including document/email review and employee interviews) in order to assemble a full analysis on the correct tax position.  Such analysis could then form the basis of a "defence pack" ready to be used for when HMRC resume their enquiries.

There may also be businesses which, while not yet the target of an HMRC investigation, may be concerned about becoming so in the future.  This may particularly be the case for businesses which, for example:

  • have not recently updated or considered their transfer pricing documentation and policies;
  • have undergone changes in their business model; or
  • have not notified HMRC that they are potentially within the scope of DPT in the past but have considered doing so.

Any such businesses should consider reviewing their transfer pricing and DPT positions as soon as possible in order to ascertain whether there is cause for concern.  If issues do come to light, businesses might then consider compiling a defence pack as outlined above to be used in case HMRC do decide to start an investigation.  Alternatively, if the analysis concludes that there are serious issues, businesses might want to consider a voluntary disclosure to HMRC.  Although the registration window for the PDCF has now ended (along with its formal benefits), a voluntary disclosure is always something that can be considered and should be looked upon favourably by HMRC – indeed, a voluntary disclosure, where the taxpayer effectively helps shoulder the burden of conducting a forensic investigation, might represent an attractive option for HMRC (with its stretched resources) in the current crisis.

If you would like further information on any of the above or how Bird & Bird could assist with your transfer pricing or diverted profits position, please do contact a member of our specialist Tax Disputes and Investigations team. 

Latest insights

More Insights

Related capabilities