INTM489680 | Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: section 86 – the tax avoidance condition

This condition is met if, in connection with the supply of services, goods or other property, arrangements are in place one of the main purposes of which is to avoid or reduce a charge to corporation tax in the UK.

The legislation does not define what is meant by ‘main purpose’ or ‘one of the main purposes’. These expressions are to be given their normal meaning as ordinary English words. They have to be applied objectively, having regard to the full context and facts.

It will usually be clear whether trying to obtain a tax advantage is ‘one of the main purposes’ of a particular arrangement. Such would be the case, for example, where the arrangement would not have been carried out at all were it not for the opportunity to obtain the tax advantage, or where any non-tax objective was secondary to the benefit of obtaining the tax advantage.

HMRC would seek to apply this rule if the company has put in place arrangements that separate the substance of its activities from where the business is formally done, with a view to ensuring that it avoids the creation of a UK PE and it is clear that doing so has resulted in a saving of UK corporation tax.