In December 2014, the government published draft legislation introducing a new ‘diverted profits tax’ which could apply to many UK hotels and leisure companies transacting with overseas connected parties. This will apply from April this year.
The legislation as currently drafted is very wide ranging and can apply wherever a UK company has entered into arrangements with connected parties involving enterprises or transactions with ‘insufficient economic substance’. For example, this could apply where a UK company leases equipment from an overseas connected company located in a low tax jurisdiction, the lessor’s staff do not carry on any significant activities and it is reasonable to assume that the transaction or transactions were defined to secure a reduction in the UK company’s corporation tax liability.
The new rules could therefore potentially apply to UK hotel operating companies that lease plant and equipment, or the hotel that they operate, from a connected company located in a low tax jurisdiction.
Companies caught by the rules will be subject to a 25% tax charge.
For further information, please see our briefing note on the DPT