‘Google tax’ – meaningful or damp squib?

October 31, 2019

The UK has recently released the first full year’s figures for the Diverted Profit Tax (DPT) – the so-called ‘Google tax’. HMRC have suggested that the yield from the tax was £281m for the 2016/17 reporting period.



DPT was intended to deal with a number of perceived tax avoidance arrangements. It targeted businesses that either had significant operations in the UK, without creating a permanent establishment, or where there were transactions between connected entities that lacked economic substance but generated tax mismatches (e.g. royalty payments between the UK and a lower tax jurisdiction).

This sounds like a great result for the UK Treasury and for the new legislation. However, on closer examination informed by a little understanding of organisational dynamics and human nature, it might not be the success that HMRC are claiming.

Included in the suggested yield of £281m is a figure of £138m, which is a total drawn from DPT ‘charging notices’. These are notices that require payment of the DPT by the ‘affected’ company. The appeal process is long; so it may be well over a year before these notices are either confirmed, or indeed overturned. As such, the actual increase in tax revenues generated from such notices may be limited. In addition, HMRC have stated that many of the negotiations over the impact of DPT turn into a more involved discussion around transfer pricing. This implies that there may well have been a standard corporation tax liability, with DPT being used as a negotiating lever.

If this is the case, then the extra tax generated may be as little £33m; and that assumes all the notices are upheld. DPT may accelerate the tax charge (as losses cannot be offset in the DPT calculation), but there may not be an overall increase in revenue raised.

The balance of yield claimed is, however, from changes in taxpayer behaviour following the introduction of DPT. HMRC have identified changes in group structures and transfer pricing policies driven by the new law. This is where human nature plays its part.

HMRC say that these changes have been identified by the customer relationship managers dealing with taxpayers. These senior tax inspectors will have been tasked by HMRC senior management to identify eligible cases. HMRC will be keen to present the DPT as a success, and therefore will be actively looking for cases that can be presented as such.

Multinational groups with operations in the UK will need to revisit their arrangements to ensure that they are DPT compliant. More importantly, they must ensure that their arrangements are properly documented from a transfer pricing perspective.


Laurence Parry
Tax Partner – Kreston Reeves