Out-Law Analysis | 19 Sep 2017 | 1:12 pm | 4 min. read
For many companies the time limit for the UK's HM Revenue & Customs (HMRC) to issue a DPT preliminary notice for the first period within the new regime is approaching. DPT, unlike transfer pricing, has its own fixed timetable and process which drives a dispute to litigation, hence the need to involve legal advisers.
DPT applies in respect of profits arising on or after 1 April 2015. Where companies have notified HMRC that they are potentially within the scope of DPT, HMRC has two years from the end of the accounting period concerned to issue preliminary notice that HMRC believes there is a DPT liability. We are likely to see a flurry of notices being issued over the next few months, as many companies have 31 December year ends and the time limit for the issue of the first possible DPT preliminary charging notice for these companies is 31 December 2017.
The 25% DPT charge applies in respect of profits arising on or after 1 April 2015. It applies broadly, in two circumstances:
Companies which reviewed the position prior to the notification deadline (30 June 2016 for the period ended 31 December 2015), and decided they did not have a DPT exposure, are probably in the clear. However, note that if you did not make a disclosure, and HMRC consider that you do have a DPT exposure, then HMRC have four years to raise a preliminary notice – so you need to keep matters under review.
If you did not disclose, but had provided HMRC with full information within the time limit then HMRC may argue that the four year time limit applies. If you did not notify, but should have done, you may be assessed to penalties.
Companies which are already discussing DPT with HMRC are likely to receive a preliminary notice in the next few months. HMRC has a small team co-ordinating DPT enquiries, and has issued significant information requests to many companies.
It is unlikely that a preliminary notice will come out of the blue, but indications are that HMRC is running out of time to complete its review of all the information it has been sent. Notices may therefore be issued in a rush in order to protect time limits.
You have 30 days to make representations against a preliminary notice, and HMRC then has a further 30 days to issue the final charging notice. However, at this stage, representations can only be against a very restricted number of issues such as factual errors, you cannot argue about the fundamental principles.
The tax must then be paid within 30 days of the final notice. It cannot be postponed, and you cannot appeal to the Tribunal for another 12 months.
The review period is 12 months, or a shorter period if HMRC and the company agree. You need to consider how to make best use of this period, particularly as HMRC is likely to be under time pressure and may struggle to cope with the volume of work during 2018.
If HMRC are not moving matters forward in the review period, you may want to consider asking HMRC to agree to curtail the review period so that you can go to straight to the Tribunal. However, you would only want to do this if there was no chance of reaching a transfer pricing settlement, as once the review period ends a transfer pricing adjustment cannot discharge the DPT liability. You will of course, unlike other tax disputes, already have paid the tax by this point which may also point towards accelerating resolution of the dispute.
Both prior to, and certainly once the review period has started, it is sensible to assume that litigation is a real possibility and prepare accordingly. The scope of any HMRC information request should be considered for its relevance to the underlying issues, and all information to be disclosed should be fully reviewed and tested for strengths and weaknesses against your understanding of the facts, with consideration given to whether it is necessary to give context to the information being provided at that time.
HMRC may also request meetings with senior management within the business, to better understand the facts, and such meetings can both accelerate and facilitate the progression of discussions. Nevertheless, it is prudent to give thought to how to manage such requests, for example, whether the business is best served providing such explanations in person or in correspondence.
Affected companies need to ensure that all evidence is preserved. This includes email accounts of people who have left. Key witnesses should be identified and you should begin to prepare their witness statements. Also consider whether an expert report, such as on transfer pricing, is likely to be necessary.
An appeal to HMRC needs to be submitted within 30 days after the end of the review period. At this stage, you need to set out your case and the grounds for appeal – so in parallel with negotiating with HMRC during the review period, you need to be preparing for litigation: waiting until the end of the review period is be too late.
Companies should treat the receipt of a preliminary notice as potential litigation. Group general counsel should be involved and a detailed action plan should be drawn up in conjunction with legal advisers. If the amount of tax at stake is significant, groups will also need to consider whether any public announcement will be necessary.