Transparency data

Diverted Profits Tax yield: methodological note

Published 27 January 2020

1. Background

This note explains how outturn yield was estimated for the Diverted Profits Tax (DPT) in the Transfer Pricing and Diverted Profits Tax statistics publication, up to and including 2017 to 2018.

The DPT was introduced in the UK on 1 April 2015 to address tax avoidance by Multinational Enterprises. The DPT is designed to encourage large businesses to change behaviours that are aimed at minimising tax liabilities through the use of contrived arrangements, or they will face paying tax at a higher rate (25%) than the Corporation Tax (CT) rate (19%). It is not targeted specifically at any particular sectors or companies, rather at particular behaviours and arrangements.

2. Yield from the Diverted Profits Tax

The DPT yield figures given in the Transfer Pricing and Diverted Profits Tax statistics publications until 2017 to 2018 included amounts received as a result of DPT charging notices issued by HMRC, and additional amounts of CT collected from businesses which changed their behaviour because of the introduction of DPT. For example, of the £388 million collected in 2017 to 2018, £219 million was collected through DPT charging notices and £169 million through behavioural change.

In this context, ‘behavioural change’ refers to measures undertaken by businesses to ensure a fair proportion of their profits are declared and taxed in the UK, so that they fall out of scope of the DPT. For example, businesses may make transfer pricing adjustments, or restructure to ensure that profits from the development or exploitation of Intellectual Property carried out in the UK are taxable in the UK.

Behavioural change can be divided into 2 types. First, some businesses change their behaviour because of HMRC compliance activity, for example an inquiry into a business’s tax affairs. Second, some businesses change their behaviour in response to the introduction of the DPT, but without targeted HMRC compliance activity; this is referred to as ‘spontaneous behavioural change‘. In general, the majority of the additional CT identified by HMRC is a result of HMRC compliance activity rather than spontaneous behavioural change.

Amounts collected through DPT charging notices are monitored by HMRC. Until recently, additional CT from behavioural change linked to HMRC compliance activity was also monitored and scored when there was clear evidence that the behavioural change was related to the introduction of DPT. As a result there was a relatively high level of certainty around those elements of the yield. However, additional CT collected as a consequence of spontaneous behavioural change was not observed directly. The work carried out to estimate this is outlined below.

It is challenging to separate DPT-related yield from general Transfer Pricing yield. The decision was therefore taken to stop estimating yield from compliance-related behavioural change from 2018 to 2019 onwards.

3. Additional Corporation Tax collected due to spontaneous behavioural change

To estimate additional CT collected as a result of spontaneous behavioural change by businesses, HMRC analysed CT receipts of businesses considered ‘high risk’ by HMRC’s Diverted Profits Project. This analysis uncovered a number of businesses where CT receipts have increased significantly since the introduction of the DPT.

The cases highlighted by the analysis, as well as other companies identified by the Diverted Profits Project that were likely to have changed their behaviour, underwent detailed review by HMRC Customer Compliance Managers who have expert insight into the tax affairs of large businesses. This exercise generally confirmed that a number of these businesses had spontaneously changed their behaviour and that additional CT was collected from these businesses as a result.

4. Changes to the methodology in 2017 to 2018

When this analysis was carried out prior to 2017 to 2018, operational evidence suggested more businesses than those identified by HMRC had changed their behaviour. Therefore, the 2015 to 2016 and 2016 to 2017 figures of additional CT liabilities from the identified cases were grossed up to account for any unknown cases. This was done using the same methodology as in the exchequer costing for the DPT which was produced for the Autumn Statement 2014 and certified by the Office for Budget Responsibility and resulted in only a small adjustment to the final figures.

The scope of this analysis was subsequently expanded as HMRC became confident that it could identify all cases of spontaneous behavioural change, so no grossing up was applied to the 2017 to 2018 figure. Table 1 below compares the yield estimates for 2015 to 2016 and 2016 to 2017 using the first methodology (with grossing up) and the second methodology (without grossing up). The total yield from the 2 approaches is very similar despite the uncertainty around the factor used to gross up the estimates.

5. Table 1: Comparison of outputs using the first and second methodologies

Yield, £ million	2015/16	2016/17
First methodology	31	281
Second methodology	18	310