Section 96: Section 80 Or 81 Cases: Estimating Profits for Preliminary and Charging Notices
Summary
1.This section explains how the taxable diverted profits specified in a preliminary notice or charging notice are to be estimated where sections 80 or 81 apply. For cases within section 86 (non-UK company avoiding a UK taxable presence), see section 97.
Details of the Section
2.Subsection (1) prescribes the circumstances in which the taxable diverted profits specified in a preliminary notice or charging notice must be determined in accordance with this section. The circumstances are where section 80 or section 81 applies in relation to a company for an accounting period.
3.Subsection (2) provides that the taxable diverted profits are the amount calculated in accordance with sections 84 or 85, on the basis of the best estimate that the designated officer can reasonably make at the time the notice is to be issued. This is subject to subsections (4) to (6).
4.Subsection (3) sets out “the inflated expenses condition”. This condition applies where expenses have been deducted in computing taxable profits, those expenses contribute to an “effective tax mismatch outcome”, and the designated HMRC officer considers that those expenses are greater than they would have been in a transaction between independent persons at arm’s length.
5.Subsection (4) sets out the conditions under which subsection (5) will apply. It applies when the inflated expenses condition is met and it is reasonable to assume that section 84 or subsection (4) of section 85 applies.
6.Subsection (5) provides that, where the conditions under subsection (4) are met, the best estimate made in accordance with subsection (2) is to be made by reducing by 30% the relevant expenses included in the deduction mentioned in subsection (3)(a) and ignoring the transfer pricing rules at Part 4 Taxation (International and Other Provisions) Act 2010.
7.Subsection (6) allows for the adjustment required by subsection (5)(a) to take into account a transfer pricing adjustment under Part 4 TIOPA 2010 to the deduction for expenses if reflected in a company’s tax return prior to the issue of the charging notice. The 30% reduction is adjusted accordingly, but cannot be adjusted below nil.
8.Subsection (7) modifies sections 83(3) and 84(2)(a) for the purposes of this section.
9.Subsection (8) gives HM Treasury the power to make regulations to modify the percentage specified in subsection (5)(a).
10.Subsection (10) sets out the meaning of “the material provision” and “the relevant expenses”.
Background Note
11.The diverted profits tax is a new charge on diverted profits. The main objective is to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base.
