Five Things You Need to Know About the U.K. ‘Google Tax’

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By Ben Stupples

The origins of the U.K.'s diverted profits tax trace back to a Birmingham convention center that has held the British Small Animal Veterinary Association’s annual conference since 1991.

At the Conservative Party’s 2014 conference, hosted at the International Convention Centre, then-Chancellor George Osborne publicly pledged to crack down on the global technology companies that go to “extraordinary lengths to pay little or no tax here” in the U.K.

Possibly due to these comments, the DPT became known as the “Google tax,” a measure penalizing any company the government sees as trying to avoid U.K. taxes with contrived overseas structures.

Since its introduction in 2015, however, the U.K.'s DPT has targeted more than just multinational technology companies—including London-based Diageo Plc, the maker of Johnnie Walker whiskey. In addition to that fact, here are five things that you should know about the U.K.’s “Google tax.”

1. DPT Yield May Surpass Expectations (Again)

The U.K.’s DPT yield may be set to beat its original forecasts for the second straight year.

Under DPT laws, companies must tell the U.K.’s tax authority if they may be in scope of the measure. If Her Majesty’s Revenue and Customs believes a company may owe DPT, it issues a preliminary notice. A charging notice then sets out HMRC’s DPT demands, giving companies 30 days to pay.

In a December 2014 policy paper, the U.K. Treasury said the DPT would raise 270 million pounds ($359 million) in the financial year that ended March 2017, and cited 360 million pounds for the 12 months after that.

The government collected 221 million pounds from DPT charging notices sent to companies in the financial year that ended March 2018, according to its latest summary of tax receipts. During the previous 12 months, the U.K.’s tax authority collected 138 million pounds from the charges.

In total, HMRC collected 281 million pounds from the DPT in the financial year ended March 2017, according to its latest annual report. The figure merges the 138 million pounds raised directly from the DPT, with 143 million pounds derived from companies tweaking their tax plans due to it.

Based on that past split of DPT charges and tax collected from company adjustments, the measure could easily surpass the 139 million pounds left in its original forecast for the latest financial year.

HMRC’s charging notice data “certainly shows they’re busy with it, which matches my experience,” Ian Hyde, a London-based tax partner at global law firm Pinsent Masons, previously Bloomberg Tax. “The DPT is applying to more businesses than you would have first thought when it was introduced.”

2. Practitioner Fears Are Growing Over DPT Scope

Hyde is not the only U.K. tax practitioner wary of how widely HMRC is wielding the DPT.

“The reality is that we have seen it being used to challenge a much broader spectrum of situations than we expected, and it is being pursued relatively aggressively by HMRC,” Melissa Geiger, KPMG LLP partner and head of international tax in the U.K., told Bloomberg Tax in March.

In fact, the DPT has even come under scrutiny from the U.K. barrister who advised on its design.

Philip Baker QC has contacted accounting and legal firms this year to seek examples of HMRC using the DPT beyond the tax’s original objectives, according to two people with knowledge of the matter.

“Philip has been getting in touch with some firms, seeking evidence of mission creep with the DPT,” said one of the two people, who both asked to remain anonymous, as the matter isn’t public.

Baker advised the U.K. government on tax treaty aspects surrounding the DPT, he said in January 2015.

A spokesman for HMRC responded to Bloomberg Tax, raising tax practitioners’ concerns about its use of the DPT by stressing that the measure is functioning in line with the government’s original plans.

“The Diverted Profits Tax was introduced in 2015 to discourage large companies from using contrived arrangements to avoid U.K. tax,” he said in a statement. “The DPT is working as intended, with more companies bringing their money onshore and paying the corporation tax they owe.”

Baker declined to comment.

3. Unlikely Changes to Global Companies’ Behavior

The U.K. introduced the DPT to change businesses’ external behavior around tax planning. However, from the way HMRC is enforcing it, the measure is equally enforcing internal behavorial changes.

Nicholas Wheadon, the U.K. tax director for U.S. drug-maker Johnson & Johnson, addressed this matter in a panel discussion at the 2017 International Bar Association conference in London.

“I’m having to liaise directly with many more colleagues than in the past to make sure we are providing consistent information now to HMRC,” he said about DPT inquiries. “We’re no longer just looking at a U.K. audit—they want to see where the U.K. sits within the supply chain,” he added.

External advisers are noticing these changes to multinational companies’ internal behavior, too.

Both a company’s tax and legal team will probably sit in on a DPT meeting if the businesses has received a charging notice from HMRC, said Nigel Dolman, a senior economist and transfer pricing specialist at global law firm Baker & McKenzie. Receiving a charging notice—which forces the company to pay the disputed tax before it can attempt to recover it—makes DPT a legal issue, Dolman told Bloomberg Tax.

“We’re finding with meeting over the DPT that we will often have tax people, together with one or two from finance, and then a legal professional—who could be the company’s general counsel,” he said. “In the end, that means we can have as many as 20 people in the room for the meeting.”

4. Keep Hold of Your Tax Records (and Past Emails)

The reach of HMRC’s DPT inquiries, however, goes beyond simply meeting with businesses.

“HMRC are keen to have meetings with U.K. staff and, even if they are no longer employed, review email correspondence to support their position,” Wendy Nicholls, a London-based tax partner at Grant Thornton, told Bloomberg Tax. HMRC’s DPT approach “is very thorough and quite onerous.”

“Since there is no grandfathering in DPT, businesses are required to go back several years to review why structures were put in place, Stella Amiss, PwC U.K.’s head of tax policy, told Bloomberg Tax. “This can present a challenge as it can sometimes be difficult to prove historic thought processes.”

5. HMRC is Recruiting a New Senior Tax Official

Summed up, the DPT is essentially “transfer pricing on steroids,” then-HMRC executive chairman Edward Troup said at the November 2017 Cross Atlantic and European Tax Symposium in London.

Transfer pricing and the DPT are inextricably linked, as Troup’s comments suggest, prolonging some of HMRC’s tax probes, and the authority is looking for a new senior official to oversee both issues.

The U.K.'s tax authority is recruiting a new head of transfer pricing, who will also hold the title of deputy director, according to a civil service job posting that closes June 3. In the role, the official will have to ensure “effective governance of HMRC’s work on transfer pricing and diverted profits tax.”

The move comes after HMRC has already increased the size of its DPT team by 50 percent.

Since 2015, the team has grown to 60 from 40, corporation tax director Jon Sherman said in February at an International Fiscal Association event. “We’ve put a big focus into ensuring we’ve got the right capabilities to tackle the work and also the right resources to progress cases effectively,” he added.

The Final Word: The Long-Term Effect of DPT

Three months before Sherman’s comments, one of HMRC’s most senior officials described the DPT as a “game changer” to U.K. lawmakers in a Public Accounts Committee evidence session.

Yet while the DPT is undoubtedly raising revenue for HMRC, will it hamper the U.K.’s attractiveness to foreign multinational businesses? With countries like Australia bringing in their own version of the measure, what will the long-term impacts of the U.K.’s DPT be for international tax policy?

Like DPT charging notices in company filings, the answers to these questions will emerge over time.

As KPMG’s Geiger told Bloomberg Tax two months ago, the U.K.’s DPT “probably has turned into a game-changer for the U.K., at least in the short time, because it has been a strong revenue raiser.”

“The impact on the U.K.’s competitiveness” from introducing the DPT “will take a while to be felt,” she said. In addition, “we may yet discover it was a game-changer for the wrong reasons.”

To contact the reporter on this story: Ben Stupples in London at

To contact the editor responsible for this story: Penny Sukhraj at

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