HMRC’s Profit Diversion Compliance Facility: what do businesses need to know?

HMRC's Profit Diversion Compliance Facility: what do businesses need to know?

Jason Collins (partner) and Catherine Robins (partner) at Pinsent Masons write for Accountancy Age

In January, HMRC launched a new programme called the Profit Diversion Compliance Facility (the Facility), encouraging businesses to revisit their transfer pricing and diverted profits tax compliance and settle any resulting liabilities.

Businesses need to think carefully about whether they should use the Facility—and there may also be some indirect benefit from doing so, in the form of getting some certainty for the future in a cost-effective way.

Diverted Profits Tax (DPT) was introduced in 2015 to target multinational businesses operating in the UK that were not declaring enough profit there.

In addition, over the last few years the OECD’s base erosion and profit shifting (BEPS) programme to reduce loopholes in international tax rules has resulted in a tightening up of transfer pricing requirements. To do this, they have tried to align the rules more closely to the substance of a cross-border business’s operations.

HMRC believes that, despite these developments, some enterprises have arrangements which are non-compliant.

The guidance accompanying the Facility sets out some ‘common misunderstandings’ and risk areas. One scenario identified is where risks are allocated by contract to an entity outside the UK. In practice, those risks are essentially controlled in the UK so that insufficient profit is attributed to the UK.

Those wanting to use the Facility must register with HMRC and submit a self-report within six months (unless a longer period is agreed with HMRC), disclosing the irregularities and setting out the outstanding tax, penalties, and interest. These must be paid when the report is submitted.

The report must cover all prior accounting periods still within assessment time limits. Furthermore, staff with first-hand experience of the way the business operated at the relevant time will need to be interviewed. Contemporaneous written evidence, such as emails, will need to be reviewed. Businesses will also need to self-assess whether the disclosed errors were innocent, careless or deliberate and therefore the penalty (if any) that is due.

A business cannot use the Facility if it is already under investigation at the time it registers. However, a DPT notification by a business that was not followed up by any substantive action by HMRC would probably not preclude the Facility being used.

The Facility does not offer any ‘giveaways’ for coming forward but, if the conduct of the business is such that a penalty is payable, use of the Facility may result in a lower penalty than it would otherwise have been required to pay.

There is no deadline for using the Facility. However, those who have failed to notify for DPT where the tax is treated as becoming unpaid before 1 January 2019 (for those with a 31 December year end this includes all years up to 2017), can get penalties for the failure to notify reduced to zero if they register by 31 December 2019.

Preparing a disclosure report may be costly and time consuming for a business. Nonetheless, it will lead to more control than would be the case if it faces an HMRC investigation.

Resolution should also be quicker, as HMRC says it will aim to respond to settlement proposals within 3 months. Even if HMRC is not able to accept the business proposal, the disclosure report should form the basis for a speedier resolution.

A specially designated team will consider reports submitted under the Facility; HMRC warns that it has a ‘hit list’ of enterprises it suspects are diverting profits.

HMRC intends to issue ‘nudge letters’ to some of those it has identified as potentially non-compliant—however, no business should assume that, because it hasn’t received a letter, it is in the clear.

There is also a suggestion that HMRC believes that a small number of companies have been acting fraudulently by taking positions they know to be wrong and/or misleading HMRC. HMRC’s Fraud Investigation Services Unit will be brought in wherever fraud is suspected.

As well as providing some benefits around penalties, the Facility may also have another indirect benefit.

HMRC has said that, once the self-report is agreed with the business, the treatment is likely to be acceptable going forward as well, provided there are no material changes in circumstances.

Whilst they make it clear that this is not a guarantee, some businesses might see it as a cost-effective way of achieving an ‘advanced pricing agreement’—the formal version of which can take many years to agree.

In light of this potential benefit, all businesses should stress test their transfer pricing policies and procedures against the risk areas identified in the guidance, and then decide whether the Facility should be used.

If not, they should expect that they will be approached by HMRC in the fullness of time, and make sure they are ready to respond if that happens.

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