Diverted Profits Tax

Diverted Profits Tax and Profit Shifting

The Diverted Profits Tax was introduced in the UK in 2015 to discourage large multinational businesses from shifting profits away from the UK to reduce their UK tax liability. It became widely known as the "Google tax", although it was not limited to technology companies.

The rules were aimed at arrangements in which profits appeared to have been diverted from the UK, including those involving foreign group companies, artificial structures, or avoided permanent establishments.

Why Was Diverted Profits Tax Introduced?

Diverted Profits Tax was introduced because the government was concerned that some multinational groups were making substantial sales or profits connected with the UK while paying relatively little UK Corporation Tax.

The policy aim was to encourage groups to align taxable profits with the economic activities that generated those profits. In practice, DPT also encouraged businesses to review transfer pricing, UK substance, group structures and the way they reported profits to HMRC.

Who Could Be Affected?

DPT was aimed mainly at large companies and multinational groups. It was not limited to household-name technology businesses. It could also affect businesses in other sectors, including property, retail, services, manufacturing, finance and online trading.

The rules were complex and depended on the structure of the business, the role of UK activities, connected-party transactions, overseas entities and whether arrangements lacked sufficient economic substance.

DPT Rate

When DPT was introduced, the rate was 25%. From 1 April 2023, the rate increased to 31% to remain above the main Corporation Tax rate.

The higher rate was intended to act as an incentive for affected businesses to bring profits into the normal Corporation Tax regime where appropriate, rather than leave matters to be addressed through DPT.

Corporation Tax and DPT

The Diverted Profits Tax was separate from Corporation Tax, although the two regimes were closely connected. Corporation Tax applies to taxable company profits. DPT was aimed at particular arrangements where HMRC considered that profits had been diverted away from the UK.

The main Corporation Tax rate for companies with profits over £250,000 is 25% for 2026. Smaller companies may be subject to the small profits rate or marginal relief, depending on their profits and circumstances.

Notification and HMRC Enquiries

Businesses that were potentially subject to the DPT rules had notification obligations. Failure to notify or respond properly could increase risk, penalties and HMRC scrutiny.

HMRC has used DPT alongside transfer pricing enquiries and profit diversion compliance activity. In many cases, the practical outcome has been additional Corporation Tax rather than a standalone DPT charge.

Transfer Pricing

Transfer pricing rules require transactions between connected companies to be priced as if they were made between independent parties. This is particularly important for multinational groups that move goods, services, intellectual property, finance or management functions between different countries.

Where a UK company pays an overseas group company for goods, services, royalties, loans or management charges, HMRC may consider whether the pricing reflects genuine arm's-length value and whether UK profits have been understated.

Avoided Permanent Establishments

DPT also addressed situations where a foreign company appeared to be carrying on significant UK-related activity while avoiding having a taxable permanent establishment in the UK.

For example, HMRC may examine whether UK-based staff, agents, or group companies are, in reality, creating UK sales, negotiating contracts, managing customers, or performing key business functions while profits are booked offshore.

Economic Substance

A key issue in profit diversion cases is whether the overseas arrangement has genuine economic substance. HMRC may look at where people, assets, risks and decision-making are actually located.

If profits are allocated to an overseas company that has little real activity, staff or risk, HMRC may challenge the structure and argue that more profit should be taxed in the UK.

Reform and the Newer Position

The DPT regime has been subject to reform. For accounting periods beginning on or after 1 January 2026, HMRC's newer approach includes the Unassessed Transfer Pricing Profits process for relevant transfer pricing profits that have not been assessed.

This reflects a move towards dealing with profit diversion more directly through transfer pricing and Corporation Tax mechanisms, rather than relying only on the original standalone DPT structure.

Why Businesses Should Take Advice

Profit diversion rules are technical and can involve large amounts of tax, interest and penalties. Affected businesses should take specialist tax advice before restructuring, filing returns, responding to HMRC enquiries or deciding whether notification is required.

Advice may be needed on transfer pricing documentation, permanent establishment risk, overseas group companies, intellectual property, financing arrangements, management charges, sales models, double tax treaties and HMRC disclosure routes.

Legal Challenges and Commercial Risk

When DPT was introduced, many expected legal challenges due to its rate, complexity, and interaction with international tax rules. Cross-border tax disputes can still involve treaty issues, double taxation, transfer pricing evidence and negotiations with tax authorities in more than one country.

There may also be reputational risk. Public concern about corporate tax avoidance has remained significant, particularly where businesses make substantial UK sales but report low UK taxable profits.

Practical Steps for Companies

Companies with UK activity and overseas group structures should review whether UK profits properly reflect UK functions, assets and risks. Transfer pricing policies should be documented and kept under review.

Businesses should also consider whether UK staff or agents could create permanent establishment risk, whether overseas entities have real substance, and whether existing arrangements remain defensible under current law and HMRC guidance.

When Legal or Tax Advice May Be Needed

Advice may be needed where a company has UK customers but contracts through an overseas entity, pays substantial royalties or service fees to group companies, holds intellectual property offshore, uses commissionaire or agency structures, or has been contacted by HMRC about transfer pricing or profit diversion.

A specialist tax solicitor or tax adviser can advise on Corporation Tax, transfer pricing, DPT legacy issues, Unassessed Transfer Pricing Profits, HMRC enquiries, penalties, settlement strategy and cross-border tax disputes.

Current Position

The Diverted Profits Tax was introduced to counter arrangements that diverted profits away from the UK. The rate increased to 31% from 1 April 2023, while the main Corporation Tax rate for larger companies is 25%.

For newer accounting periods, the rules have moved further towards dealing with unassessed transfer pricing profits through Corporation Tax-related processes. Businesses with cross-border structures should keep their transfer pricing, UK substance and reporting obligations under regular review.

Disclaimer

Solicitors.com is not a firm of solicitors and does not provide legal advice or tax advice. The information on this page is for general guidance only and should not be relied upon as a substitute for advice from a regulated solicitor, accountant or specialist tax adviser. Tax law, HMRC guidance and international tax rules can change, and how the law applies will depend on the facts of each case.

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