HMRC continues to promote awareness of its Profit Diversion Compliance Facility (PDCF), a facility designed to encourage multinational enterprises (MNEs) to bring their tax affairs up to date without risk of investigation by HMRC if full and accurate disclosure is made. All indicators continue to point to the Facility being a mainstay in HMRC’s tax collection toolbox, particularly given the pressure on HMRC to cover the public costs of COVID-19.

In 2019 HMRC launched a new Profit Diversion Compliance Facility to encourage businesses to stop diverting profits and pay what is due - around two-thirds of the large businesses targeted so far have decided to use the Facility to bring their tax affairs up to date quickly and efficiently. This has enabled HMRC to focus even more resources on investigating businesses which continue to divert profits.

HMRC has been periodically issuing waves of ‘nudge’ (warning) letters to taxpayers highlighting the availability of the PDCF. Following a nudge letter, businesses have 90 days to decide if they wish to enter the Facility, with the risk of an enquiry from HMRC if they do not register. With the last round of nudge letters issued in September 2020, it is expected the next round of letters will be issued to businesses imminently.

We would encourage businesses to actively consider taking advantage of the potential benefits of utilising the PDCF, regardless of whether a nudge letter has been received.

The following article provides a brief summary of what you need to know about the PDCF and why it could be important for your business.

What you need to know

The PDCF focuses on businesses across a range of industries, including financial services, asset management and oil field services, being sectors which HMRC were not historically targeting as aggressively, for example, as technology and life sciences.

The facility is designed to encourage businesses who are not confident that their transfer pricing and other tax affairs are up-to-date to review both the design and implementation of their international tax and transfer pricing policies and other tax obligations, change them if appropriate, and use the facility to put forward a report with proposals to pay any additional tax, interest and where applicable, penalties due.

To register for the PDCF, a business doesn’t necessarily need to know for certain at the time of registration that there has been non-compliance and that there is additional tax to pay. In practice, once a business registers, there is a registration meeting with HMRC where the business proposes the areas it intends to investigate and report on and HMRC may at this time share any specific risks it has identified that have not be raised by the business.

There are significant benefits in registering for the facility, especially when compared to an alternative tax audit approach. These benefits include:

1. Achieving certainty of tax treatment and avoiding potentially wider HMRC investigations (if a full disclosure is made);

2. Reduced penalties in that registration in the facility provides unprompted penalty treatment;

3. Enabling businesses to bring their tax affairs up to date in a self-managed manner; and

4. Providing an accelerated process, given that HMRC aims to respond to proposals within three months of submission.

Why is this important

HMRC has shown considerable focus on promoting the PDCF since its inception and, given indications from HMRC, they are pleased with the process so far in terms of the cooperation of businesses and the quality of disclosures made. This has secured around £6 billion since new measures were introduced in 2015 and we expect this focus to continue and sharpen with the pressure on to cover the public costs of COVID-19.

The most recent round of nudge letters was issued during September 2020 and it is widely anticipated that another round will be released this year. Given the benefits of the facility, there is also an increasing number of businesses who are proactively applying before receiving a letter form HMRC. This proactive approach is especially relevant for those businesses with structures or arrangements considered high-risk by HMRC, for which it is likely a matter of when, not if, HMRC will ask questions. Potentially impacted businesses should have clear analysis and support, at an increased level of factual detail than possibly previously undertaken.

Businesses should therefore carefully consider the potential advantages of utilising the PDCF, whether or not they have already received a nudge letter, in order to take advantage of the benefits the facility can provide in the right circumstances.

At Alvarez and Marsal, we have both considerable experience with the PDCF and a dedicated team of Transfer Pricing specialists, working with businesses to optimise the outcome of entering the facility. If your business has concerns it may fall into scope of the PDCF, or indeed the Diverted Profits Tax regime, please get in touch with Richard Syratt.