Profit diversion compliance facility

Time is running out for companies to register with HMRC’s new ‘Profit Diversion Compliance Facility’ (PDCF) as the deadline of 31 December 2019 is fast approaching. As the name suggests PDCF is a facility. Perhaps because it is not a legislative change, with which groups must comply, many groups are not aware of the facility. However, HMRC are being very active and have already issued several ‘reminder letters’ to ensure compliance with the new ‘diverted profits tax’ legislation.

In recent years large multinational groups have no doubt felt pressure from tax authorities and the wider public in respect to paying appropriate tax on their global profits.  This is partially due to a review of tax systems at an international level, resulting in domestic tax changes as well as increased negative publicity for non-tax payers.  The UK introduced a penal tax called ‘diverted profits tax’, more commonly referred to as the ‘google tax’, which imposes a higher tax rate on profits diverted from the UK.

HMRC’s investment in technology and the introduction of additional compliance requirements for large groups, including Country-by-Country reporting, and publication of tax strategy, is helping to enable HMRC to identify groups who may be shifting profits from the UK.  As HMRC have increased its capacity to identify high-risk groups, more groups, of a smaller size, may also find themselves subject to increased scrutiny from HMRC.   

PDCF is one of the latest efforts from HMRC designed to prevent large groups from shifting profits from the UK to low tax jurisdictions such as ROI or the Channel Islands.

In light of the above developments, many groups have reviewed their transfer pricing policies, however, HMRC suspect that some have not.  As such, HMRC have developed the PDCF as a way to encourage groups to bring their UK tax affairs up to date.

The advantages in making a disclosure under the PDCF include: reduced or no penalties, should any additional tax in respect of earlier years arise; HMRC will not normally issue a divert profits tax investigation notice; tax will be due at a lower rate should it transpire the group ought to have been paying diverted profits tax; as the facility is a voluntary disclosure rather than being subject to a HMRC investigation, the group has more control over the review process; and HMRC will not publish a list of those who make a disclosure under PDCF, therefore there will be no reputational damage.

Groups who have concerns over whether their activities may fall within diverted profits tax legislation may wish to register with HMRC’s PDCF before 31 December 2019.  Once registered, they will be required to submit a report to HMRC, which will outline whether the transfer pricing policies and methodologies have been applied in accordance with the OECD transfer pricing guidelines. If  they are not, it will give the group the opportunity to bring their tax affairs up to date. With three weeks until the deadline, time is of the essence.