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Finance (No. 2) Bill (HC Bill 193)

Finance (No. 2) BillPage 90

(b) the total amount of any relevant taxable income of a connected
company, for that company’s corresponding accounting period, which
would have resulted from the relevant alternative provision.

(5) If subsection (4) does not apply, the taxable diverted profits that arise to the
5relevant company in the accounting period are the sum of—

(a) the notional additional amount (if any) arising from the relevant
alternative provision, and

(b) the total amount (if any) of any relevant taxable income of a connected
company, for that company’s corresponding accounting period, which
10would have resulted from the relevant alternative provision,

(6) In subsection (5) “the notional additional amount” means the amount by
which—

(a) the amount in respect of which the company would have been
chargeable to corporation tax for that period had the relevant
15alternative provision been made or imposed instead of the material
provision, exceeds

(b) the amount—

(i) in respect of which the company is chargeable to corporation
tax for that period by reason of the application of Part 4 of
20TIOPA 2010 (transfer pricing) to the results of the material
provision,

(ii) which, in a case where section 81 applies, is attributable (in
accordance with sections 20 to 32 of CTA 2009) to UKPE, and

(iii) which is taken into account in an assessment to corporation tax
25which is included before the end of the review period in the
company’s company tax return for that accounting period.

Avoidance of a UK taxable presence

86 Non-UK company avoiding a UK taxable presence

(1) This section applies in relation to a company (“the foreign company”) for an
30accounting period if—

(a) the company is non-UK resident in that period,

(b) it carries on a trade during that period (or part of it),

(c) a person (“the avoided PE”), whether or not UK resident, is carrying on
activity in the United Kingdom in that period in connection with
35supplies of services, goods or other property made by the foreign
company in the course of that trade,

(d) section 87 (exception for companies with limited UK-related sales or
expenses) does not operate to prevent this section applying in relation
to the foreign company for the accounting period,

(e) 40it is reasonable to assume that any of the activity of the avoided PE or
the foreign company (or both) is designed so as to ensure that the
foreign company does not, as a result of the avoided PE’s activity, carry
on that trade in the United Kingdom for the purposes of corporation tax
(whether or not it is also designed to secure any commercial or other
45objective),

(f) the mismatch condition (see subsection (2)) or the tax avoidance
condition (see subsection (3)) is met or both those conditions are met,

(g) the avoided PE is not excepted by subsection (5), and

Finance (No. 2) BillPage 91

(h) the avoided PE and the foreign company are not both small or medium-
sized enterprises for that period.

(2) “The mismatch condition” is that—

(a) in connection with the supplies of services, goods or other property
5mentioned in subsection (1)(c) (or in connection with those supplies
and other supplies), arrangements are in place as a result of which
provision is made or imposed as between the foreign company and
another person (“A”) by means of a transaction or series of transactions
(“the material provision”),

(b) 10the participation condition is met in relation to the foreign company
and A (see section 106),

(c) the material provision results in an effective tax mismatch outcome, for
the accounting period, as between the foreign company and A (see
sections 107 and 108),

(d) 15the effective tax mismatch outcome is not an excepted loan relationship
outcome (see section 109),

(e) the insufficient economic substance condition is met (see section 110),
and

(f) the foreign company and A are not both small or medium-sized
20enterprises for the accounting period.

(3) “The tax avoidance condition” is that, in connection with the supplies of
services, goods or other property mentioned in subsection (1)(c) (or in
connection with those supplies and other supplies), arrangements are in place
the main purpose or one of the main purposes of which is to avoid or reduce a
25charge to corporation tax.

(4) In subsection (1)(e) the reference to activity of the avoided PE or the foreign
company includes any limitation which has been imposed or agreed in respect
of that activity.

(5) The avoided PE is “excepted” if—

(a) 30activity of the avoided PE is such that, as a result of section 1142 or 1144
of CTA 2010, the foreign company would not be treated as carrying on
a trade in the United Kingdom in the accounting period through a
permanent establishment in the United Kingdom by reason of that
activity, and

(b) 35in a case where—

(i) section 1142(1) of that Act applies, but

(ii) the avoided PE is not regarded for the purposes of section
1142(1) of that Act as an agent of independent status by virtue
of section 1145, 1146 or 1151 of that Act,

40the foreign company and the avoided PE are not connected at any time
in the accounting period.

(6) Where the foreign company is a member of a partnership—

(a) for the purposes of subsection (1)—

(i) a trade carried on by the partnership is to be regarded as a trade
45carried on by the foreign company, and

(ii) supplies made by the partnership in the course of that trade are
to be regarded as supplies made by the foreign company in the
course of that trade, and

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(b) for the purposes of subsection (2)(a) provision made or imposed as
between the partnership and another person is to be regarded as made
between the foreign company and that person.

(7) In this section “arrangements” includes any agreement, understanding,
5scheme, transaction or series of transactions (whether or not legally
enforceable).

87 Exception for companies with limited UK-related sales or expenses

(1) Section 86 does not apply to the foreign company for an accounting period if
one or both of the following conditions is or are met.

(2) 10The first condition is that, for the accounting period, the total of—

(a) the UK-related sales revenues of the foreign company, and

(b) the UK-related sales revenues of companies connected with the foreign
company,

does not exceed £10,000,000.

(3) 15The second condition is that the total of—

(a) the UK-related expenses of the foreign company incurred in the
accounting period, and

(b) the UK-related expenses of companies connected with the foreign
company incurred in that period,

20does not exceed £1,000,000.

(4) But if the accounting period is a period of less than 12 months, the amounts
specified in subsections (2) and (3) are to be reduced proportionally.

(5) In this section—

  • “the foreign company” has the same meaning as in section 86;

  • 25UK activity” means activity carried on in the United Kingdom in
    connection with supplies of services, goods or other property made by
    the foreign company in the course of the trade mentioned in section
    86(1)(b);

  • “UK-related expenses”, of a company, means the expenses of that
    30company which relate to UK activity;

  • “UK-related sales revenues” means—

    (a)

    in the case of the foreign company, the sales revenues of that
    company from UK-related supplies, and

    (b)

    in the case of a company connected with the foreign company,
    35the sales revenues of the first mentioned company to the extent
    that they—

    (i)

    are from UK-related supplies, and

    (ii)

    are trading receipts which are not taken into account in
    calculating the profits of that company which are
    40chargeable to corporation tax;

  • “UK-related supplies” means supplies of services, goods or other
    property which are made—

    (a)

    by the foreign company or a company connected with the
    foreign company, and

    (b)

    45relate to UK activity.

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(6) For the purposes of this section “revenues” or “expenses” of a company, in the
relevant accounting period, are amounts which, in accordance with generally
accepted accounting practice (“GAAP”), are recognised as revenue or (as the
case may be) expenses in the company’s profit and loss account or income
5statement for that period.

(7) Where a company does not draw up accounts for the relevant accounting
period in accordance with GAAP, the reference in subsection (6) to any
amounts which in accordance with GAAP are recognised as revenue or
expenses in the company’s profit and loss account or income statement for the
10relevant accounting period is to be read as a reference to any amounts which
would be so recognised if the company had drawn up such accounts for the
relevant accounting period.

(8) “Generally accepted accounting practice” is to be construed in accordance with
section 1127 of CTA 2010.

(9) 15The Treasury may by regulations, made by statutory instrument, substitute a
different figure for the figure for the time being specified in subsection (2) or
(3).

(10) Regulations under this section are subject to annulment in pursuance of a
resolution of the House of Commons.

20Calculation of taxable diverted profits: section 86 cases

88 Calculation of taxable diverted profits in section 86 case: introduction

(1) If section 86 applies for an accounting period, section 89, 90 or 91 applies to
determine the taxable diverted profits of the foreign company.

(2) But see also section 97 for how a designated HMRC officer estimates those
25profits when issuing a preliminary notice under section 93 or a charging notice
under section 95.

(3) Subsections (4) to (12) define some key expressions used in sections 89 to 91
and this section.

(4) “The foreign company” has the same meaning as in section 86.

(5) 30“The notional PE profits”, in relation to an accounting period, means the profits
which would have been the chargeable profits of the foreign company for that
period, attributable (in accordance with sections 20 to 32 of CTA 2009) to the
avoided PE, had the avoided PE been a permanent establishment in the United
Kingdom through which the foreign company carried on the trade mentioned
35in section 86(1)(b).

(6) “The material provision” has the same meaning as in section 86.

(7) “The relevant alternative provision” means the alternative provision which it
is just and reasonable to assume would have been made or imposed as between
the foreign company and one or more companies connected with that
40company, instead of the material provision, had tax (including any non-UK
tax) on income not been a relevant consideration for any person at any time.

(8) For the purposes of subsection (7), making or imposing no provision is to be
treated as making or imposing an alternative provision to the material
provision.

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(9) “The actual provision condition” is met if—

(a) the material provision results in expenses of the foreign company for
which (ignoring Part 4 of TIOPA 2010 (transfer pricing)) a deduction for
allowable expenses would be allowed in computing what would have
5been the notional PE profits for the accounting period, and

(b) the relevant alternative provision—

(i) would also have resulted in allowable expenses of the foreign
company of the same type and for the same purposes (whether
or not payable to the same person) as so much of the expenses
10mentioned in paragraph (a) as results in the effective tax
mismatch outcome mentioned in section 86(2)(c), but

(ii) would not have resulted in relevant taxable income of a
connected company for that company’s corresponding
accounting period.

(10) 15“Relevant taxable income” of a company for a period is—

(a) income of the company, for the period, which would have resulted
from the relevant alternative provision and in relation to which the
company would have been within the charge to corporation tax had
that period been an accounting period of the company, less

(b) 20the total amount of expenses which it is just and reasonable to assume
would have been incurred in earning that income and would have been
allowable expenses of the company for that period.

(11) “Connected company” means a company which is or, if the relevant alternative
provision had been made, would have been connected with the foreign
25company.

(12) “The mismatch condition” has the same meaning as in section 86.

89 Section 86: calculation of profits where only tax avoidance condition is met

(1) This section applies where—

(a) section 86 applies for an accounting period, and

(b) 30the mismatch condition is not met.

(2) The taxable diverted profits that arise to the foreign company in the accounting
period by reason of that section applying are an amount equal to the notional
PE profits for that period.

90 Section 86: mismatch condition is met: calculation of profits by reference to
35the actual provision

(1) This section applies where—

(a) section 86 applies for an accounting period,

(b) the mismatch condition is met, and

(c) the actual provision condition is met.

(2) 40The taxable diverted profits that arise to the foreign company in the accounting
period, in relation to the material provision in question, are an amount equal
to the notional PE profits for that period.

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91 Section 86: mismatch condition is met: calculation of profits by reference to
the relevant alternative provision

(1) This section applies where —

(a) section 86 applies for an accounting period,

(b) 5the mismatch condition is met, and

(c) the actual provision condition is not met.

(2) The taxable diverted profits that arise to the foreign company in the accounting
period, in relation to the material provision in question, are determined in
accordance with subsections (3) to (5).

(3) 10Subsection (4) applies if the actual provision condition would have been met
but for the fact that the relevant alternative provision would have resulted in
relevant taxable income of a company for that company’s corresponding
accounting period.

(4) The taxable diverted profits that arise to the foreign company in the accounting
15period are an amount equal to the sum of—

(a) the notional PE profits for the accounting period, and

(b) the total amount of any relevant taxable income of a connected
company, for that company’s corresponding accounting period, which
would have resulted from the relevant alternative provision.

(5) 20If subsection (4) does not apply, the taxable diverted profits that arise to the
foreign company in the accounting period are the sum of—

(a) what would have been the notional PE profits of the foreign company
for that period had the relevant alternative provision been made or
imposed instead of the material provision, and

(b) 25the total amount of any relevant taxable income of a connected
company, for that company’s corresponding accounting period, which
would have resulted from the relevant alternative provision.

Duty to notify if within scope

92 Duty to notify if potentially within scope of tax

(1) 30Where a company meets the requirements in subsection (3) or (4) in relation to
an accounting period of the company, the company must notify an officer of
Revenue and Customs to that effect.

This is subject to subsections (7) and (8).

(2) A notification under subsection (1) must be made—

(a) 35in writing, and

(b) within the period of 3 months beginning at the end of the accounting
period to which it relates (“the notification period”).

See also subsection (9) for provision about the content of notifications.

(3) A company meets the requirements of this subsection if—

(a) 40section 80 or 81 applies in relation to the company for the accounting
period, and

(b) in that period, the financial benefit of the tax reduction is significant
relative to the non-tax benefits of the material provision.

(4) A company meets the requirements of this subsection if—

Finance (No. 2) BillPage 96

(a) section 86 applies in relation to the company for the accounting period,
and

(b) where that section applies by reason of the mismatch condition being
met, in that period the financial benefit of the tax reduction is
5significant relative to the non-tax benefits of the material provision.

(5) For the purposes of subsections (3) and (4), this Part has effect subject to the
following modifications—

(a) in section 80, ignore subsection (1)(f),

(b) in section 86, for subsection (1)(e) substitute—

(e) 10the foreign company is not, as a result of the avoided
PE’s activity, within the charge to corporation tax by
reason of the foreign company carrying on a trade in the
United Kingdom,,

(c) in subsection (2) of that section, ignore paragraph (e), and

(d) 15in subsection (3) of that section, for “the main purpose or one of the
main purposes of which is to avoid or reduce a charge to corporation
tax” substitute “that result in the reduction of a charge to corporation
tax in consequence of which there is an overall reduction in the amount
of tax (including foreign tax) that would otherwise have been payable
20in respect of the activity mentioned in subsection (1)(c)”.

(6) In subsections (3)(b) and (4)(b), “non-tax benefits” means financial benefits
other than—

(a) the financial benefit of the tax reduction, and

(b) any financial benefits which derive (directly or indirectly) from any
25reduction, elimination or delay of any liability of any person to pay any
tax (including any non-UK tax).

(7) The duty under subsection (1) does not apply in relation to an accounting
period of the company (“the current period”)—

(a) if, at the end of the notification period, it is reasonable (ignoring the
30possibility of future adjustments being made in accordance with Part 4
of TIOPA 2010 (transfer pricing)) for the company to conclude that no
charge to diverted profits tax will arise to the company for the current
period,

(b) if, before the end of the notification period, an officer of Revenue and
35Customs has confirmed that the company does not have to notify an
officer in relation to the current period because—

(i) the company, or a company which is connected with it, has
provided HMRC with sufficient information to enable a
designated HMRC officer to determine whether or not to give a
40preliminary notice under section 93 to the first mentioned
company in respect of the accounting period, and

(ii) HMRC has examined that information (whether in the course of
an enquiry made into a return or otherwise and whether in
relation to diverted profits tax or otherwise),

(c) 45if, at the end of the notification period, it is reasonable for the company
to conclude that sub-paragraphs (i) and (ii) of paragraph (b) apply, or

(d) if—

(i) the immediately preceding accounting period of the company is
a period in respect of which notification was given under
50subsection (1), or not required to be given by virtue of
paragraph (b) or (c) or this paragraph, and

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(ii) at the end of the notification period for the current period, it is
reasonable for the company to conclude that there has been no
change in circumstances which is material to whether a charge
to diverted profits tax may be imposed for the current period.

(8) 5The Commissioners for Her Majesty’s Revenue and Customs may also direct
that the duty under subsection (1) does not apply in relation to an accounting
period in other circumstances specified in the direction.

(9) A notification under subsection (1) must—

(a) state whether the obligation to notify arises by reason of section 80, 81
10or 86 (as modified by subsection (5)) applying in relation to the
company for the accounting period;

(b) if it states that section 86 applies, state the name of the avoided PE;

(c) if it states that section 80 or 81 applies, contain a description of the
material provision in question and the parties between whom it has
15been made or imposed;

(d) if it states that section 86 applies—

(i) state whether or not the mismatch condition is met, and

(ii) if it is met, contain a description of the material provision in
question and the parties between whom it has been made or
20imposed.

Process for imposing charge

93 Preliminary notice

(1) If a designated HMRC officer has reason to believe that—

(a) one or more of sections 80, 81 and 86 applies or apply in relation to a
25company for an accounting period, and

(b) as a result, taxable diverted profits arise to the company in the
accounting period,

the officer must give the company a notice (a “preliminary notice”) in respect
of that period.

(2) 30See sections 96 and 97 for provision about the calculation of taxable diverted
profits for the purposes of a preliminary notice.

(3) A preliminary notice must—

(a) state the accounting period of the company to which the notice applies;

(b) set out the basis on which the officer has reason to believe that one or
35more of sections 80, 81 and 86 applies or apply in relation to the
company for that accounting period;

(c) explain the basis on which the proposed charge is calculated,
including—

(i) how the taxable diverted profits to which the proposed charge
40would relate have been determined,

(ii) where relevant, details of the relevant alternative provision (see
section 82(5) or 88(7)) by reference to which those profits have
been determined, and

(iii) how the amount of interest comprised in that charge in
45accordance with section 79(2)(b) would be calculated,

(d) state who would be liable to pay the diverted profits tax;

Finance (No. 2) BillPage 98

(e) explain how interest is applied in accordance with section 101 of FA
2009 (late payment interest on sums due to HMRC) if the diverted
profits tax is not paid, the period for which interest is charged and the
rate at which it is charged.

(4) 5Where the designated HMRC officer has insufficient information to determine
or identify any of the matters set out in subsection (3), it is sufficient if the
preliminary notice sets out those matters determined to the best of the officer’s
information and belief.

(5) Subject to subsection (6), a preliminary notice may not be issued more than 24
10months after the end of the accounting period to which it relates.

(6) Where—

(a) notification under section 92 has not been received by an officer of
Revenue and Customs in respect of an accounting period of a company
within the period specified in subsection (2)(b) of that section, and

(b) 15a designated HMRC officer believes, in relation to that accounting
period, that an amount of diverted profits tax that ought to have been
charged under this Part has not been charged,

a designated HMRC officer may issue to the company a preliminary notice in
respect of that tax within the period of 4 years after the end of the accounting
20period.

(7) Where a preliminary notice is issued to a company, the officer must give a copy
of the notice—

(a) if the notice is issued on the basis that section 81 applies, to UKPE, and

(b) if the notice is issued on the basis that section 86 applies, to the avoided
25PE.

94 Representations

(1) This section applies where a designated HMRC officer gives a preliminary
notice, in respect of an accounting period, to a company under section 93 (and
that notice is not withdrawn).

(2) 30The company has 30 days beginning with the day the notice is issued to send
written representations to the officer in respect of the notice.

(3) Representations made in accordance with subsection (2) are to be considered
by the officer only if they are made on the following grounds—

(a) that there is an arithmetical error in the calculation of the amount of the
35diverted profits tax or the taxable diverted profits or an error in a figure
on which an assumption in the notice is based;

(b) that the small or medium-sized enterprise requirement is not met;

(c) that in a case where the preliminary notice states that section 80 or 81
applies—

(i) 40the participation condition is not met,

(ii) the 80% payment test is met, or

(iii) the effective tax mismatch outcome is an excepted loan
relationship outcome;

(d) that in a case where the preliminary notice states that section 86
45applies—

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(i) section 87 (exception for companies with limited UK-related
sales or expenses) operates to prevent section 86 from applying
for the accounting period, or

(ii) the avoided PE is “excepted” within the meaning of section
586(5);

(e) that in a case where the preliminary notice states that section 86 applies
and that the mismatch condition (within the meaning of section 86(2))
is met, the condition is not met because—

(i) the participation condition is not met,

(ii) 10the 80% payment test is met, or

(iii) the effective tax mismatch outcome is an excepted loan
relationship outcome (within the meaning of section 109(2)).

(4) But, unless they are representations under subsection (3)(a) in respect of
arithmetical errors, nothing in subsection (3) requires the officer to consider
15any representations if, and to the extent that, they relate to—

(a) any provision of Part 4 of TIOPA 2010 (transfer pricing), or

(b) the attribution of profits of a company to a permanent establishment in
the United Kingdom through which the company carries on a trade
(including any notional attribution made for the purposes of section 89,
2090 or 91).

(5) “The small or medium-sized enterprise requirement” is—

(a) where the notice was issued on the basis that section 80 or 81 applies,
the requirement in section 80(1)(g), and

(b) where the notice was issued on the basis that section 86 applies to the
25company, the requirement in subsection (1)(h) or (2)(f) of that section.

(6) “The participation condition” means—

(a) where the notice was issued on the basis that section 80 or 81 applies,
the condition in section 80(1)(c), and

(b) where the notice was issued on the basis that section 86 applies to the
30company, the condition in subsection (2)(b) of that section.

(7) “The 80% payment test” means the requirement in section 107(3)(d).

95 Charging notice

(1) This section applies where a designated HMRC officer has given a company a
preliminary notice under section 93 in relation to an accounting period.

(2) 35Having considered any representations in accordance with section 94, the
officer must determine whether to—

(a) issue a notice under this section (a “charging notice”) to the company
for that accounting period, or

(b) notify the company that no charging notice will be issued for that
40accounting period pursuant to that preliminary notice,

and must take that action before the end of the period of 30 days immediately
following the period of 30 days mentioned in section 94(2).

(3) A notification under subsection (2)(b) does not prevent a charging notice being
issued for the same accounting period pursuant to any other preliminary
45notice the person may be given in respect of that period.