Autumn budget 2021: corporation tax enquires cannot be closed during a DPT review period

The change reverses a recent decision of the First-tier Tribunal (FTT) which directed HM Revenue & Customs (HMRC) to issue corporation tax closure notices even though a  DPT review period was ongoing. HMRC said the change is being made to ensure that the DPT legislation “functions as intended”.

“This change means that HMRC can continue to put pressure on companies with potential DPT liabilities to accept HMRC’s view on transfer pricing and settle their disputes by amending their corporation tax return rather than risking a DPT liability,” said Sam Wardleworth a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.

The legislation currently provides that the taxpayer can amend their corporation tax return to make a transfer pricing adjustment during the first 12 months of the 15-month DPT review period and this will mean that the DPT liability is discharged. Corporation tax is currently payable at 19% whereas DPT is payable at 25%.

However, if the taxpayer amends the return themselves there is no right of appeal and so this only works for a group which is happy to settle its dispute on HMRC’s terms, Wardleworth said. 

The case recently considered by the FTT concerned a Swiss-owned corporate group. The group did not agree with HMRC’s transfer pricing analysis but wanted HMRC to issue corporation tax closure notices so that they could be appealed, essentially meaning that when the dispute was resolved corporation tax would be payable rather than DPT, which would be more favourable to the taxpayer.

Once a corporation tax enquiry is opened, the taxpayer cannot get their dispute heard in the tax tribunal until HMRC issues a closure notice setting out the amount of tax it believes is due, which the taxpayer can appeal. If HMRC refuses to issue a closure notice, the taxpayer can apply to the FTT for a direction that HMRC should issue a closure notice.

In DPT disputes if corporation tax closure notices are not issued during the DPT review period, the companies concerned would be out of time to amend the returns and so their only course of action would be to appeal the DPT notice at the end of the review period, but that would mean any tax would be payable at the higher DPT rate.

The change means that HMRC will not be able to close a corporation tax enquiry into profits subject to a DPT charge until after the DPT review period ends – and so they cannot be directed to do so by the FTT.

The change came into force immediately on 27 October and applies to any application for a corporation tax closure notice made on or after 27 September 2021, which was the date the FTT decision was published.

Another change to the DPT rules announced in the budget is favourable to taxpayers. This changes the time when the taxpayer can make a voluntary amendment to their corporation tax return from the first 12 months of the 15-month DPT review period to anytime in that period except the last 30 days. This change also has effect from 27 October and will apply in relation to enquiries which are already ongoing.

DPT is aimed at multinationals operating in the UK that structure their affairs to avoid creating a UK permanent establishment or where there are arrangements between connected parties, which 'lack economic substance' in order to exploit tax mismatches. It is a separate tax to corporation tax.

If HMRC considers that DPT is payable it issues a charging notice stating the amount of DPT payable. Following receipt of a charging notice, a company has 30 days to pay any DPT due and HMRC has 15 months to review the charge to DPT. The review period gives HMRC an opportunity to try to reach an agreement on the amount of DPT due. The charging notice cannot be appealed until the end of the review period.