Diverted Profits Tax – the Glencore case and judicial review

Diverted Profits Tax (DPT) was introduced in Finance Act 2015 to prevent companies diverting profits from the UK. It was a new tax, so not covered in existing double taxation agreements, designed to shore up the UK tax regime in the early days of the OECD Base Erosion and Profit Shifting Action Plan before there was an agreement on co-ordinated action at the international level.

There are two strands to the DPT regime which applies in the following circumstances.

  • Where a UK company has arrangements in place with a related non-UK entity that reduce UK tax liabilities and those arrangements lack economic substance.
  • Where a foreign company carries on trading activities in the UK but those activities are specifically designed to avoid creating a permanent establishment (a taxable presence) for that foreign company in the UK.

In the 2015 Budget Red Book DPT was estimated to collect a little over £300m each year: its principal purpose was to deter companies from diverting profits from the UK. Any profits caught by DPT are chargeable at 25% compared with the rate of 20% in 2015 and the current CT rate of 19%.

DPT sets up a mechanism under which, if HMRC has “reason to believe” that DPT applies, it can issue a preliminary notice in respect of which the taxpayer can make written representations. After that HMRC can issue a charging notice determining the amount of tax that it believes is payable under DPT. That triggers the liability to pay the tax within 30 days. There is then a 12 month review period during which HMRC can determine what amount of DPT is actually payable, after which the taxpayer has a further 30 days to appeal that second notice and can appeal to the First-tier Tribunal if they are not happy with the result of the review.

Glencore applied to the High Court for judicial review to provide a quicker remedy to the dispute with HMRC than is available under the specific DPT legislation. 

Mr Justice Green rejected Glencore’s case for judicial review on the grounds that:

“In my judgment the FA 2015 provides a comprehensive two-stage, dispute-resolution mechanism which first facilitates and encourages negotiations between the taxpayer and HMRC and then, if this is unproductive, allows for an appeal to a specialist tribunal.” 

But he did recognise that in some cases judicial review is an appropriate remedy.

“Judicial review is a remedy of last resort such that where an alternative remedy exists that should be exhausted before any application for permission to apply for judicial review is made. …The rule is not however invariable and where an alternative remedy is nonetheless ineffective or inappropriate to address the complaints being properly advance then judicial review may still lie.”

But his final conclusion was that:

“There is no real utility in this case proceeding to a judicial review and I consider [Glencore’s] case to be stronger under the statutory procedure than under judicial review. There is no clear saving in time or expense. There are no really important points of law arising which justify a judgment of the High Court.

I therefore refuse permission upon the basis that the statutory review process is a perfectly adequate alternative remedy.”