HMRC introduces Profits Diversion Compliance Facility

HMRC has announced today the introduction of a new Profits Diversion Compliance Facility, which is aimed at tackling the avoidance of tax by multinationals by diverting profits outside the UK without proper economic justification. The facility represents a step-change in how HMRC intends to tackle transfer pricing and diverted profits tax (DPT) cases going forward, but the measure potentially also brings into the picture permanent establishment and other tax issues such as WHT, CFCs, hybrids and mismatch rules, and corporate residence.

The facility involves taxpayers accepting that they may owe some additional tax for earlier years, and then taking the lead in raising that with HMRC, developing a proposal and presenting it to HMRC for approval or discussion. This potentially allows taxpayers to retain control, minimise HMRC intervention, and also minimise or eliminate tax-related penalties.

This development comes at a time when HMRC is looking to cast the net beyond the largest and most high-profile companies. It has challenged the transfer pricing arrangements of such companies in recent years, often with what it sees as significant success. It is now looking to catch other groups that it believes avoid paying the right amount of tax in the UK. HMRC has created new teams and added staff to handle cases, and indicated that it has used data analytics to identify companies that it sees as a risk to the UK Treasury.

How the facility works

Taxpayers are able to register with HMRC their intention to use the facility. Taxpayers then have six months from the date of registration to file a detailed report that includes a proposal to settle any tax, interest and penalties that are due.

The facility is open for all prior accounting periods where HMRC is within relevant time limits. It is not open to taxpayers already subject to an investigation by HMRC in relation to profit diversion. However, it may still be used where there are enquiries into other matters.

HMRC will acknowledge receipt of the registration, and arrange a "Registration Meeting" for the taxpayer or its advisors to explain its plans and timetable for completing the report.

After submission, HMRC will consider whether the conclusions reached in the report and the taxpayer's proposals are soundly based on appropriate evidence, the technical analyses are well-founded, and the transfer pricing adopted is reasonable and consistent with the OECD Guidelines. If the proposals for the additional tax, interest and potentially penalties to be paid are accepted, HMRC will close the relevant accounting periods, and commit to not issuing DPT Preliminary Notices for relevant periods.

Taxpayers that use the facility in the manner expected by HMRC will be treated as having made an unprompted disclosure for the purpose of considering penalties. Where taxpayers register to use the facility before 31 December 2019, this may mean that taxpayers will not be charged penalties even where they have filed inaccurate returns or failed to notify for DPT.

What happens if HMRC does not accept a proposal?

If HMRC does not accept a proposal, it will discuss the tax authority's concerns with the business and agree next steps. This may involve limited work or a more fundamental investigation. Depending on circumstances, this may involve HMRC's Fraud Investigation Service.

Who the facility is aimed at?

The facility is aimed at the sort of arrangements targeted by DPT. In practice, this means many of the "old-style" transfer pricing models, especially ones with principals, hubs, or entrepreneurs that are paying low rates of tax. Critically, this includes transfer pricing arrangements that have been widely accepted in the past by tax authorities worldwide, even by HMRC itself in Advance Pricing Agreements or after lengthy audit. It also includes structures and models that some advisors still see as correct, due in part to local differences in law and interpretation of the arm's length principle. Extensive guidance is provided by HMRC about what it sees as "risk indicators".

HMRC has indicated in the guidance issued that it may over a period of time send letters to businesses which its risk analysis suggests have a combination of features commonly associated with profits diversion. The letters would suggest that the businesses concerned consider using the facility where they have not already registered, and HMRC has not already started an investigation.

Based on our experience, having a detailed transfer pricing report will not be seen by HMRC in many cases as demonstrating or proving that what it sees as "high risk" transfer pricing is correct. HMRC has challenged, and secured significant adjustments in, numerous cases even where taxpayers had extensive transfer pricing documentation.

What HMRC expects the report to contain?

The guidance issued by HMRC provides a detailed explanation of what HMRC expects the report to include. The contents fall into six categories.

  1. Description of the relevant facts – extensive information of the sort collected in lengthy HMRC investigations.
  2. Application of the law to the facts – technical analysis of TP, DPT and multiple other areas of tax, and the conclusions reached.
  3. Analysis of the taxpayer's position on the application of penalty provisions.
  4. The proposal to settle all outstanding liabilities.
  5. A signed declaration by an individual(s) on behalf of the business as to the full and accurate disclosure made.
  6. An Annex listing the evidence examined that supports the facts referred to in the report.

What do you need to do?

Where HMRC has not opened or conducted a DPT investigation, multinationals should reconsider as a matter of priority whether:

  • they have an exposure to DPT and/or transfer pricing adjustments;
  • using this facility makes sense and fits into the group's overall tax strategy;
  • MAP or APA applications need to be considered.

Our take

The new facility effectively stands things on its head, and asks taxpayers to do the extensive work that HMRC case teams would usually do themselves. The information and analyses required are extensive, and obtaining them and preparing the report will undoubtedly impose a significant additional burden.

In some cases, using the facility will not be necessary, or be the best option. In others, it may represent the lesser of two evils. Its use will allow businesses in some circumstances to avoid penalties and to manage the process much more smoothly than if HMRC lead an investigation, and will offer some level of assurance about positions going forward.

How we can help?

If you have questions, we would be pleased to explain more, and discuss what the facility means for you.

Our team includes specialists that have successfully settled some of the most significant DPT and TP investigations carried out by HMRC in recent years. It also includes a former senior HMRC officer: HMRC's lead transfer pricing economist, founder of their transfer pricing economics team, and inaugural member of HMRC's DPT team.

This, and the expertise of our team of technical international tax specialists, will allow us in most cases to tell you quickly whether HMRC will see your case as high risk, and then advise on whether or not using the facility is the right thing for you to do. If it is, we have the hands-on experience and insights from both sides of the table to help you navigate the process.

Download PDF Back To Listing