Multinational tax + tax gap → Diverted Profits Tax + 2026 reform

Diverted Profits Tax + 2026 UTPP Reform (Finance Act 2015)

Diverted Profits Tax was introduced by Finance Act 2015 (the so-called 'Google Tax') to address two perceived gaps in the corporate tax framework: foreign companies avoiding a UK permanent establishment despite significant UK activity; and arrangements between connected parties that lack economic substance and reduce UK Corporation Tax. The rate was set higher than CT (originally 25%, raised to 31% from April 2023) deliberately, to incentivise multinationals to settle by paying CT rather than DPT. From 2026 the regime is being substantially restructured: DPT is being replaced by an Unassessed Transfer Pricing Profits (UTPP) Charge integrated into the transfer pricing framework, simplifying the dual-regime overlap that has caused practitioner friction since 2015. Published case law on DPT is limited because most cases settle pre-litigation.

Last reviewed: 24 May 2026

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In plain English

DPT was designed to do two things: deter structures and create a settlement lever. The deterrence works by making non-compliance more expensive than compliance. DPT at 31% is higher than CT at 25% — a multinational facing a DPT assessment has incentive to settle by paying CT (lower rate, deductible under treaties) rather than fighting DPT (higher rate, treaty position contested). The settlement lever works through the notification + charging notice mechanism. The taxpayer must notify HMRC if DPT might apply within 3 months of period-end. HMRC then has 24 months to issue a preliminary notice + charging notice. The taxpayer must pay DPT within 30 days of charging notice (then dispute) — pay first, argue later. This 'pay-up-front' mechanism is what makes DPT economically powerful. The 2026 reform integrates DPT into transfer pricing, ending the dual-regime overlap. The new Unassessed Transfer Pricing Profits Charge is intended to be more practitioner-friendly while preserving HMRC's settlement leverage. Watch the Finance Bill for detail.

How it works

Charge 1: Avoided UK PE

Applies where a foreign company has significant UK activity (typically UK sales personnel) but no formal UK PE, AND the arrangements were designed to avoid a UK PE, AND the tax benefit is more than incidental. Targets pre-2015 'Limited Risk Distributor' and 'Commissionaire' structures.

Charge 2: Entities lacking economic substance

Applies to transactions between connected parties (typically UK Co + foreign affiliate) where the arrangement lacks economic substance AND reduces UK CT AND the tax benefit is more than incidental. Effectively a transfer-pricing backstop with bite.

Notification

Taxpayer must notify HMRC within 3 months of end of accounting period if DPT might apply. Failure to notify carries separate penalty regime (Sch 16 FA 2015 + Sch 24 FA 2007). 'Might apply' is interpreted broadly — many groups notify defensively.

Charging mechanism + pay-up-front

HMRC issues preliminary notice → charging notice within 24 months. Taxpayer pays DPT within 30 days of charging notice. Review period: 12 months. After review period, taxpayer can appeal to FTT — but DPT remains paid throughout dispute. Pay first, argue later.

2026 UTPP reform

DPT to be restructured as Unassessed Transfer Pricing Profits Charge — integrated into the transfer pricing framework rather than a separate regime. Removes the dual-regime overlap that has caused practitioner friction. Preserves the pay-up-front settlement lever in revised form. Watch Finance Bill drafting.

Who this applies to + key conditions

Foreign companies with significant UK activity but no formal UK PE
Multinational groups with UK-affiliate transactions reducing UK CT
SME exception: groups with <250 employees AND turnover <€50m or balance sheet <€43m generally excluded
De minimis threshold: arrangements with UK tax benefit <£10m typically not pursued

Statute + manual references

Primary: Finance Act 2015 Part 3 + Schedule 16 — Diverted Profits Tax.

Related: Finance Act 2022 + Finance Act 2023 — DPT rate increases and refinements; TIOPA 2010 Part 4 — transfer pricing (interaction); TIOPA 2010 Part 9A — CFC rules (interaction); 2026 Finance Bill — Unassessed Transfer Pricing Profits Charge

HMRC manual: INTM489000+ (International Manual — DPT)

Common mistakes + traps

Treating DPT as a profits tax computed like CT — DPT has its own computational rules in Sch 16 FA 2015
Forgetting the notification obligation — 3-month deadline carries penalty risk
Assuming DPT can be challenged before payment — pay-up-front rule applies
Assuming DPT settles by treaty — treaty position is contested by some counterparties
Believing SME exception requires only one threshold — both employee + turnover/balance sheet conditions apply

Worked example

Group Y — US tech company with UK sales operation, pre-2015 structure

Group Y has 200 UK sales staff who pitch and close deals with UK customers. Contracts are signed by Ireland-resident sales director. UK Co is engaged as a 'limited risk service provider' earning cost+5%. UK CT bill on the cost+5% margin is £2m. Ireland books £100m profit on UK-customer revenue.

Step 1 — UK sales activity is substantial, but no formal UK PE (contracts signed in Ireland).
Step 2 — DPT Charge 1 (avoided PE) applies if arrangements were designed to avoid PE + tax benefit > incidental.
Step 3 — HMRC issues notification request, then preliminary notice estimating UK profit if Ireland-routing were unwound (~£25m UK profit attributable to UK sales activity).
Step 4 — DPT @ 31% on the £25m would be £7.75m.
Step 5 — Group Y can either (a) restructure to formal UK PE and pay CT @ 25% on the £25m (£6.25m), or (b) accept DPT charge (£7.75m). Settlement at CT is cheaper.
Step 6 — Group Y restructures: UK Co becomes formal PE, books £25m UK profit, pays CT £6.25m. DPT settlement leverage achieved.

Outcome: DPT functions exactly as designed: deterrent and settlement lever rather than primary revenue source. Group Y now pays CT on UK economic activity at standard rate. Yield for HMRC: indirect via CT rather than direct DPT collection.

How this connects to the rest of the framework

Transfer pricing basics →

DPT is a backstop to transfer pricing; 2026 UTPP reform integrates the two regimes.

Pillar Two — 15% global min tax →

Pillar Two and DPT both address profit-shifting but via different mechanisms (jurisdictional ETR vs UK-specific charge).

Famous UK CT controversies →

DPT was nicknamed 'Google Tax' — directly motivated by the famous cases corridor.

BEPS — 15 Actions →

DPT is one of the UK's earliest BEPS-aligned unilateral measures.

Frequently asked questions

What happens if I miss the Self Assessment deadline?+

The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.

Do I need an accountant or can I file Self Assessment myself?+

Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.

How do payments on account work?+

When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.

How much does DPT actually collect?+

Direct DPT yield is modest (low hundreds of millions). The bigger effect is indirect — CT increases from restructuring to avoid DPT. HMRC publishes both figures in annual reports.

Why is published DPT case law so limited?+

Most cases settle pre-litigation. The pay-up-front mechanism makes litigation economically unattractive for taxpayers; HMRC also prefers settlement.

Will the 2026 UTPP reform reduce HMRC's leverage?+

Government statements indicate intent to preserve the settlement lever in revised form. Final detail in Finance Bill drafting.

Free + regulated-body resources

HMRC INTM489000+ (DPT) →
Definitive DPT authority
Finance Act 2015 Part 3 + Sch 16 →
Statutory text
CIOT DPT technical commentary →
Practitioner commentary

Last reviewed: 24 May 2026