HMRC has announced the launch of a new measure to encourage voluntary disclosure of corporate tax irregularities – the Profit Diversion Compliance Facility. The facility is designed to encourage companies to disclose mistakes and/or non-compliance related to profits diverted from the UK.
HMRC understands that many companies with international operations are diverting profits overseas that should be subject to diverted profits tax (DPT). Such profit diversion can take place in a number of ways and include transfer pricing policies or arranging businesses so that economic profits are taxable overseas although business operations are in the UK.
DPT was introduced in 2015 and is aimed at activities that divert profits away from the UK so that they are not subject to corporation tax. The DPT rate of tax is 25% compared with the standard corporation tax rate which is 19%. Many will be unsurprised that HMRC is focusing on international businesses that operate in lower tax jurisdictions given the ongoing focus of the UK Treasury, the EU and OECD across all the developed tax regimes.
The disclosure facility offers businesses the opportunity to avoid paying diverted profits tax (DPT) arising on existing arrangements that are disclosed. Although there is no amnesty involved, companies that come forward under the facility will be able to settle issues for a lower penalty and without the threat of criminal prosecution. Companies have until 31 December 2019 to register and benefit from the terms of the facility.
It is understood that HMRC has already undertaken a risk assessment to identify the businesses that it believes are affected and therefore expect to hear from. It is likely that HMRC will issue "nudge" letters to those businesses it would expect to come forward and use the facility.
For any businesses that do not take advantage of the facility by the current deadline, non-compliance with UK tax obligations could result in penalties of up to 30% of any tax HMRC considers is owed, as well as the threat of 100% penalties in cases of suspected fraud or potential criminal prosecution.
Whilst some may see this as a move aimed at technology companies and those with valuable IP, it could affect any company with international operations. It would be wise for such companies to consider their arrangements to determine whether they need to correct their position before HMRC undertakes its own investigation. HMRC investigations into DPT and transfer pricing arrangements have found that some companies are adopting policies that are out of line with OECD guidelines and, in some instances, are deliberately shifting profits to low or no tax jurisdictions without justification.
This initiative marks a change in HMRC's approach to disputes involving transfer pricing, placing an emphasis on companies to justify the filing positions that they have adopted. Whilst HMRC has received criticism over their perceived light-touch handling of corporate tax avoidance, this facility shows it means business and wants to encourage companies to engage with it.