Glossary · UK
What is Diverted Profits Tax (DPT)?
A UK tax charged at a rate above the main Corporation Tax rate on profits that large multinational groups have artificially diverted away from the UK.
Full Definition
Diverted Profits Tax (DPT) is a UK tax introduced in 2015, aimed at large multinational groups that use contrived arrangements to divert profits generated by activity in the UK to other, typically lower-tax, jurisdictions, in a way that goes beyond normal, defensible transfer pricing. It targets two main situations: arrangements designed to avoid creating a UK taxable presence (a "permanent establishment") for a foreign company that is nonetheless carrying on real business activity in the UK, and transactions between connected companies that lack real economic substance and are structured mainly to reduce UK tax through excessive payments, such as inflated management fees or royalties, to a group company overseas. DPT is deliberately set at a rate higher than the main rate of Corporation Tax, so that the tax advantage of diverting profits is removed and then some, giving affected groups a strong incentive to restructure their arrangements on normal commercial terms rather than pay the DPT charge. HMRC can issue a "preliminary notice" and then a formal DPT charging notice requiring payment within 30 days, before any appeal is heard, which -- much like an Accelerated Payment Notice -- removes the cash-flow advantage of disputing the charge. In practice, DPT has acted mainly as a deterrent: many large groups have voluntarily restructured their UK arrangements, or agreed a settlement with HMRC under normal Corporation Tax rules, rather than pay the higher DPT rate.