Finance Act 2015

97 Section 86 cases: estimating profits for preliminary and charging notices

(1) Where taxable diverted profits arising to the foreign company in an accounting period fall to be determined under section 89, 90 or 91, for the purposes of issuing a preliminary notice under section 93 or a charging notice under section 95 the taxable diverted profits to be specified in the notice are determined instead in accordance with this section.

(2) The taxable diverted profits are such amount as the designated HMRC officer issuing the notice determines, on the basis of the best estimate that can reasonably be made at that time, to be the amount calculated in accordance with section 89, 90 or 91 (as the case may be).

But this is subject to subsections (4) and (5).

(3) For the purposes of subsection (4), “the inflated expenses condition” is met if—

(a) the mismatch condition is met,

(b) the material provision results in expenses of the foreign company for which (ignoring Part 4 of TIOPA 2010 (transfer pricing)) a deduction for allowable expenses would be allowed in computing the notional PE profits of the foreign company for the accounting period,

(c) the expenses result, or a part of the expenses results, in the effective tax mismatch outcome mentioned in section 86(2)(c), and

(d) in consequence of paragraphs (a) to (c), the designated HMRC officer issuing the notice considers that the relevant expenses might be greater than they would have been if they had resulted from provision made or imposed as between independent persons dealing at arm’s length.

(4) Subsection (5) applies where the designated HMRC officer issuing the notice considers that—

(a) the inflated expenses condition is met, and

(b) it is reasonable to assume that section 90 or 91(4) applies.

(5) Where this subsection applies, the best estimate made by the officer in accordance with subsection (2) is to be made on the assumption that—

(a) so much of the deduction mentioned in subsection (3)(b) as relates to the relevant expenses is reduced by 30%, and

(b) in relation to the relevant expenses, Part 4 of TIOPA 2010 (transfer pricing) is ignored.

(6) The Treasury may by regulations, made by statutory instrument, substitute a different percentage for the percentage for the time being specified in subsection (5)(a).

(7) Regulations under this section are subject to annulment in pursuance of a resolution of the House of Commons.

(8) In this section—

(a) “the relevant expenses” means so much of the expenses mentioned in subsection (3)(b) as result in the effective tax mismatch outcome as mentioned in section 86(2)(c), and

(b) “the foreign company”, “the material provision” and “the mismatch condition” have the same meaning as in section 86.