Diverted Profits Tax: Is HMRC Looking at Your Company?

What Is Diverted Profits Tax?

Diverted Profits Tax (DPT) is a UK tax charged at 31% on profits HMRC considers to have been artificially diverted out of the UK. Introduced in April 2015 and governed by the Finance Act 2015, it sits alongside Corporation Tax rather than replacing it. The rate increased from 25% to 31% in April 2023, keeping it deliberately above the main Corporation Tax rate of 25% to remove any financial incentive to divert profits.

DPT is not a niche concern for only the largest global corporations. HMRC has broadened its focus, and any UK limited company with cross-border arrangements, overseas subsidiaries, or non-UK service providers could find itself under review.

Which Companies Are in Scope?

DPT applies in two main scenarios:

• Avoided permanent establishment: A foreign company carries on activity in the UK in a way that avoids creating a taxable presence (permanent establishment), often using a UK-based entity to sell or support its business without formally recognising a UK profit.
• Insufficient economic substance: A UK company enters into transactions with connected overseas parties where the arrangements lack genuine commercial purpose and result in a UK tax reduction. This is the scenario most relevant to UK-incorporated limited companies.

If your company pays significant fees to an overseas entity you control, licences intellectual property held offshore, or routes contracts through a low-tax jurisdiction without clear business reasons, HMRC may argue those profits belong in the UK.

The Mismatch and Lack of Economic Substance Tests

HMRC will look at whether your arrangements create a tax mismatch outcome — meaning the overseas party pays little or no tax on income received from your UK company — and whether those arrangements have sufficient economic substance. Substance means real people, real decisions, and real activity in the territory where profits are being recognised. A brass-plate company or a nominee director structure will not satisfy this test.

How HMRC Enforces DPT

DPT has a distinctive enforcement process that differs from standard Corporation Tax enquiries:

• HMRC issues a preliminary notice giving the company 30 days to make representations.
• If HMRC is not satisfied, it issues a charging notice and the tax becomes due within 30 days — before any appeal is heard.
• The company must pay first and dispute later, which creates significant cash flow pressure.
• HMRC has up to 24 months from the end of the accounting period to issue a preliminary notice.

This pay-first mechanism is intentional. It is designed to encourage early settlement and discourage prolonged avoidance arrangements.

Notification Obligations

UK companies that may be within scope of DPT have a legal obligation to notify HMRC within three months of the end of the accounting period in which the potentially chargeable arrangements existed. Failure to notify can result in penalties even if no DPT ultimately becomes due. Review your cross-border arrangements before each year-end with this deadline in mind.

Practical Steps for Limited Company Directors

• Map your cross-border transactions: Document every payment to or from connected overseas entities and be clear on the commercial rationale.
• Test for economic substance: Ensure any overseas entity has real employees, genuine decision-making, and activity proportionate to the profits it earns.
• Review transfer pricing: DPT often runs alongside transfer pricing risks. Ensure intercompany pricing reflects arm's-length terms.
• Check your notification position: If there is any doubt, speak to a tax adviser before the three-month notification deadline passes.
• Document everything: HMRC expects contemporaneous records supporting the commercial purpose of your structure.

The Bottom Line

DPT is a powerful tool and HMRC is actively using it. If your limited company has any cross-border element to its structure, do not assume you are too small to attract attention. A proactive review of your arrangements now is far less costly than a charging notice later.