In Refinitiv Ltd & Ors v HMRC [2024] EWCA Civ 1412, the Court of Appeal (CoA) held that Diverted Profits Tax (DPT) notices were correctly issued and were not inconsistent with an Advance Pricing Agreement (APA), as the five-year term to which the APA applied had expired.
Diverted Profits Tax (DPT), was introduced on 1 April 2015 by the Finance Act 2015 and is charged when:
- A foreign company makes large volumes of sales in the UK but avoids UK tax by ensuring that the sales are not concluded through a UK Permanent Establishment (PE) and so are 'booked' for tax purposes in a different country.
- Entities or transactions lack economic substance. This applies where a UK company or a UK PE of a foreign company artificially reduces its UK profits by making transactions with, or payments to, low-taxed related companies which lack economic substance.
In Refinitiv Ltd & Ors v HMRC [2024] EWCA Civ 1412, HMRC issued the taxpayers with Diverted Profits Tax (DPT) notices for more than £167 million.
- The notices related to the year ended 31 December 2018 and were calculated using the 'profit-split' transfer pricing method.
- The taxpayer Appealed, arguing that the Advance Pricing Agreement (APA), which required the use of the 'cost-plus' method, covered the transactions subject to the DPT notices and those notices were unlawful under public law.
The Upper Tribunal (UT) had previously found that the APA had no effect for the purposes of calculating profits in 2018 and that the DPT notices were lawful.
- The APA stated that parties were bound 'for the duration of the agreement,' which was a five-year term specified in Clause 9.
- The APA's role is to inhibit HRMC’s ability to make alternative transfer pricing adjustments during that same five-year period. If the intention had been for the five years to circumscribe a period in which covered transactions were undertaken, the clause would have been expressed differently.
- The APA had terminated in 2014 and therefore could not apply to the year ended 31 December 2018.
- The taxpayer appealed to the Court of Appeal (CoA), arguing that the UT had erred in law in holding that DPT notices were lawful because “it failed to recognise and give proper effect to the APA in its relevant statutory context”.
The CoA found that:
- Whether the DPT notices were lawful depended on whether they were inconsistent with the terms of the APA.
- The APA's scope is determined by the document itself and the APA cannot influence the treatment of the company's tax affairs in later years unless it is renewed.
- The five-year period specified in Clause 9 ended in 2014 and was at the outer limit of duration that HMRC are normally willing to agree. There was nothing in the agreement to suggest that it continued to apply after this date.
The CoA dismissed the appeal.
Editor's Comments
In November 2024, the Organization for Economic Cooperation and Development (OECD) released the Mutual Agreement Procedures (MAP) and Advance Pricing Arrangements (APA) statistics. According to the data, the average time taken to grant a UK APA in 2023 was 45.5 months (three years and 10 months). HMRC's guidance states that the maximum period they usually consider for granting an APA is five years. This means that companies intending to rely on an APA for certainty must consistently plan to ensure they have an APA in place when needed.
Useful guides on this topic
Diverted Profits Tax
Large multinational enterprises (MNEs) that use arrangements between connected parties to divert profits away from the UK and avoid UK tax, will be subject to the Diverted Profits Tax (DPT). Who does it apply to? What are the rules?
Companies: Permanent establishment & residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?
BEPS & Diverted Profits Tax (for SME owners)
What is BEPS? What is Diverted Profits Tax? Will either of these affect me or my SME clients?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
External links
Refinitiv Ltd & Ors vs HMRC [2024] EWCA Civ 1412
Mutual Agreement Procedure Statistics per jurisdiction: United Kingdom
