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HMRC launches profit diversion compliance facility

12 February 2019. Published by Adam Craggs, Partner and Michelle Sloane, Senior Associate

On 10 January 2019, HMRC launched their Profit Diversion Compliance Facility (PDCF). The PDCF is a new voluntary disclosure facility, aimed at multinational enterprises (MNEs), that provides them with an opportunity to disclose and correct tax inaccuracies relating to profits diverted out of the UK.

Introduction 

The PDCF is being publicised by HMRC as something of a last chance for MNEs to regularise their cross border tax arrangements before HMRC get tough on non-compliance and come looking for them.

The new facility is designed to encourage MNEs to bring their tax affairs up to date and avoid an investigation by HMRC provided a full and accurate disclosure is made.

The PDCF is intended for use where a business’s cross border arrangements are not already under investigation by HMRC. HMRC has compiled a list of MNEs it considers are at risk of diverting profits. We anticipate that HMRC will shortly begin sending these businesses so-called “nudge” letters designed to encourage them to review their affairs and use the PDCF, or face an HMRC investigation.

Why use the PDCF?

The main advantages of using the PDCF is that businesses can regularise their tax affairs without investigation by HMRC and the disclosure will be treated as “unprompted” by HMRC so they will receive lower penalties.

MNEs that fail to register and are subsequently found to be non-compliant with their UK tax responsibilities will face far higher penalties and a possible criminal investigation. In addition, MNEs could also face irreparable reputational damage as HMRC can also “name and shame” them if their behaviour is considered to be deliberate.  

How to use the PDCF

MNEs who wish to use the PDCF should:

  • register for the PDCF by submitting the appropriate form to HMRC. The deadline to register is 31 December 2019
  • within six months of registration, unless HMRC agrees a longer period, a report which includes a proposal to settle any tax, interest and penalties (where applicable), should be submitted to HMRC.
HMRC aim to respond to submitted reports within three months. The disclosure report should contain the following: 

Report should contain:

  • a description of the relevant facts referenced to the evidence from which they are derived
  • an analysis of the application of the tax law to the facts and the conclusions reached
  • an analysis of the behaviours investigated and the conclusions reached on the application of penalty provisions
  • the proposal being made to settle all outstanding liabilities, plus any penalties and interest
  • a signed declaration by a senior responsible officer certifying that to the best of their knowledge and belief it is a full and accurate disclosure of the facts
  • an annex listing the evidence that supports the facts referred to in the report the best of their knowledge and belief it is a full and accurate disclosure of the facts
It is important that the report is comprehensive and accurate, if it is not, HMRC will investigate. In addition, if HMRC believes it has been deliberately misled, a criminal or civil investigation into suspected tax fraud may be commenced.

How can we help?

We can assist you by:

  1. assessing your cross border tax risks

  2. assessing whether and how you may be able to use the PDCF and guide you through the process from registration through to completion

  3. preparing (together with your other tax advisers if necessary) your PDCF disclosure report 

  4. meeting with HMRC and negotiating settlement of any tax liability or penalty which you may have

  5. designing procedures to help you ensure your future transactions with related parties and business structures are fully compliant with relevant transfer pricing requirements and do not fall foul of the diverted profits tax provisions
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