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HMRC’s approach to Diverted Profits Tax

HM Revenue & Customs’ current policy concerning Diverted Profits Tax appears to be in direct contravention to Government guidance given in Parliament. Andy Briggs and Heather Self explain how this has been exposed in the Vitol case.

Case summary

In Vitol Aviation UK Ltd & others v HMRC [2021] UKFTT 353 (TC), the First Tier Tribunal (FTT) found that HM Revenue & Customs (HMRC) should formally close Corporation Tax enquiries into the Vitol companies, on the basis that HMRC had received sufficient information to do this. The FTT also ruled that an ongoing Diverted Profits Tax (DPT) review period did not constitute grounds to refrain from closing the enquiries.


Vitol is a global commodities trader, with headquarters in Switzerland. Its UK subsidiaries provide a range of services to its headquarters, including brokerage, aviation fuel transactions, and support services. In 2016, the company applied to enter into an Advance Pricing Agreement (APA), and HMRC requested an analysis of the application of DPT to the UK companies.

HMRC also issued DPT notices to two Vitol companies in the UK, as well as opening Corporation Tax Self Assessment enquiries into the UK companies covering the periods from 31 December 2016 to 31 December 2018.

Closing the enquiries

It was agreed by the parties that the only outstanding matter under enquiry as at November 2020 was agreement over the transfer pricing for two Vitol companies in the UK, however HMRC refused to issue closure notices to conclude the enquires.

If closure notices were issued, Vitol would be able to appeal them, with any litigation would be dealt with under Corporation Tax legislation (rather than DPT). The alternative was for Vitol to amend the returns themselves, following which they would not then be able to litigate. Vitol therefore applied to the FTT for a closure notice direction under FA 1998 Sch 18, para 33.

HMRC argued it had reasonable grounds for refusing to closure notices for two reasons:

  1. the applicants had not provided information reasonably requested by HMRC and required for HMRC to arrive at conclusions needed to formulate the closure notices; and
  2. the issue of closure notices for the two Vitol companies would pre-empt the end of the DPT review periods for these companies.

First Tier Tribunal findings

The FTT found that by November 2020, HMRC had formulated a basis for concluding the enquiry, and any additional information provided would not be likely to change that basis. Therefore, an additional information request issued at this point did not form reasonable grounds for not issuing the closure notices requested.

The Judge also noted that OECD Transfer Pricing Guidelines allowed for reasonable estimates to be used, given that transfer pricing is not an ‘exact science’; it was not therefore reasonable for HMRC to continue to seek further information to refine their calculations once they had established a suitable basis for conclusion of the enquiry.

DPT issues

The FTT also rejected HMRC’s second point that the issuance of the closure notices would pre-empt the end of the DPT review periods.

The Judge mentioned a statement made by Mel Stride MP, then the Economic Secretary to the Treasury, during a Parliamentary Select Committee debate on 29 November 2018, when he said:

When DPT is charged, companies are required to pay up front before they can lodge a dispute with HMRC during the DPT review period. DPT incentivises companies to agree adjustments to their Corporation Tax return during the DPT review period and thus pay the correct amount of Corporation Tax on their diverted profits, thereby removing such profits from the DPT charged.”

The judge went on to state that the DPT legislation clearly intends to ensure that companies “pay the correct amount of Corporation Tax” on the profits in dispute, and that where the correct amount of Corporation Tax is paid on those profits, the profits are removed from the charge to DPT.

Based on the above, the Judge found in favour of the Vitol companies, and issued a direction for HMRC to issue closure notices.

Change in policy coming?

HMRC’s current policy is not to close Corporation Tax Self Assessment enquiries where DPT review periods are in process. This policy would appear to be in direct contravention to the above ruling, and it remains to be seen what HMRC’s policy response will be.

One result of this decision may be that HMRC will be less able to use the DPT ‘stick’ to incentivise taxpayers to make voluntary transfer pricing adjustments. Once a taxpayer voluntarily amends its return to include disputed profits, those profits fall outside DPT. However, taxpayers may now prefer to force HMRC to issue a closure notice, which can then be appealed in the ordinary way.

It is also worth noting that in the past, it has been rare for taxpayers to take the initiative in this way to try to force the issuance of a closure notice. Given the common delays in the progression of HMRC enquiries, this FTT case may embolden taxpayers to take the initiative in this way to try to force HMRC’s hand in concluding enquiries, particularly where DPT review periods are underway.

First published in Accounting Web.

For more information, please contact Andy Briggs or Heather Self using the details on this page.