HMRC launched the profit diversion compliance facility in January 2019 to tackle the perceived continued diversion of profits away from the UK by multinational businesses through the use of particular operational structures and/or aggressive transfer pricing policies. In particular, HMRC says that it has found that some businesses have adopted cross-border pricing arrangements that are based on an incorrect fact pattern and/or are not consistent with the OECD’s transfer pricing guidelines.
The disclosure facility aims to encourage companies to review both the design and implementation of their operational structures and transfer pricing policies and make any appropriate changes. They are encouraged to use the facility to put forward a detailed tax report, including proposals to pay any additional tax, interest or penalties that may be due where adjustments to previously filed returns are required. By using the facility, affected companies will thereby bring their UK tax affairs up to date, reduce the risk of profit diversion in the future and limit the threat of further, more costly, HMRC interventions.
HMRC follow up activity to date
Although the facility is open to all companies, since January, HMRC has, to date, issued three tranches of ’nudge’ letters to potentially affected businesses it has identified, giving each company to whom a letter was sent 90 days in which to decide whether to register or risk HMRC opening an investigation into profit diversion. The third tranche of letters was sent in September. In most cases, companies must register by 31 December 2019 to be eligible for maximum penalty reductions. Once registered under the facility, companies generally have up to six months to prepare and submit their reports to HMRC and pay any tax due.
We understand from HMRC that the majority of businesses that received a nudge letter in the first and second tranches have registered under the facility. HMRC has also opened enquiries into many of those that received such letters but did not register.
For those affected, there is a significant amount of work involved to prepare the necessary disclosures. HMRC has indicated that its primary focus is on the first accounting periods covered by the diverted profits tax (DPT), which came into effect on 1 April 2015, and the information requested may therefore typically be limited to accounting periods falling into 2015 and 2016 to minimise the amount of material required to be produced. HMRC has said, however, that it may enquire into later periods, presumably based upon the information set out in the disclosures made.
HMRC has also suggested to businesses that, once any necessary settlement under the facility has been agreed, they may wish to apply for an advance pricing agreement (APA) to provide comfort on transfer pricing arrangements for future periods.
Take appropriate action
We would therefore urge businesses that have received a profit diversion compliance facility nudge letter to take professional advice in order to agree suitable next steps, and would recommend that those businesses that operate internationally but haven’t received such a letter consider whether they wish to act, as there may only be a limited period of time left to benefit from the maximum penalty reductions.
For more information please get in touch with Suze McDonald.