Dispute Resolution Prevention – Part Three

Our take on the Profit Diversion Compliance Facility

Although the title of the Facility eludes to DPT, the facility is principally designed to encourage MNEs to realign their UK profits with economic activity and, by amending transfer pricing positions, eliminate any potential DPT. This allows an MNE to change their transfer pricing where appropriate and use the facility to put forward a report with a proposed adjustment to pay any additional tax and interest. If HMRC has opened enquiries into matters other than Profit Diversion, the Facility will still be available.

In certain circumstances, HMRC may issue a “nudge letter” to taxpayers with respect to arrangements that could fall within the remit of DPT. This letter is not a circular and should be taken seriously; HMRC only issue these letters if they believe your UK tax positions represent a DPT risk. This is an invitation for the taxpayer to consider entering the facility to disclose their arrangements and present a proposal.

Whilst a taxpayer who has received a nudge letter has no obligation to use the facility, if they do not HMRC reserves its right to open an enquiry/investigation. Tackling profit diversion is a stated priority of HMRC and based on data quoted by them it is highly likely they would exercise this right. Taxpayer behaviour in ignoring a letter is likely to jeopardise penalty mitigation in the event of adjustments arising out of an enquiry, even if you have an APA or had an enquiry in the past. Simply ignoring these letters is not therefore recommended.

HMRC are under no obligation to issue a nudge letter and may open an enquiry using normal enquiry powers (including discovery powers). 

Whether or not a nudge letter is received, the main benefits of the PDCF compared to an enquiry being opened are:

• It enables MNEs to bring their tax affairs up to date openly, efficiently and without investigation by HMRC if a full and accurate disclosure is made;
• It gives MNEs certainty for the financial years covered by the proposal, once accepted by HMRC;
• Provides an accelerated process compared to an enquiry, with a direct link into the relevant HMRC specialists. HMRC will aim to respond to the proposal within three months of submission;
• It allows an MNE to manage its own internal processes around, objectively, what evidence to gather, who is interviewed, what comparables are used (if any), and how the analysis is presented within the PDCF framework. In an enquiry, this is mainly completed on HMRC’s instruction, as they would take the lead; and
• It provides unprompted penalty treatment, even where a nudge letter is received. Unprompted disclosure penalty treatment can mean no tax geared penalties are levied.

In general, the PDCF is a much more regimented and organised process, which provides a taxpayer with a clear end point and objective, and gives them control over the process. Whilst the PDCF may be resource intensive at the start, this is for a set amount of time (usually six months from registration, unless agreed otherwise) and has a clear objective in order for an MNE to focus its resources on a particular issue or topic.

In comparison, during an enquiry the taxpayer is at the mercy of the information requests sent by HMRC. No one can predict the frequency, length or depth of these requests, or how long the information gathering stage will last. This could result, in our experience, with the taxpayer being stuck in a loop, responding to the same questions rephrased multiple times, even before the technical part of the enquiry starts. It also means taxpayers cannot predict or plan resources or areas of focus. The taxpayer would have limited control over the process and no indication of how long the enquiry will last or what the outcome may be. Based on the 2018/19 Transfer Pricing and DPT statistics, an enquiry lasted 33 months on average.

Overall, in the absence of a nudge letter, where there is any doubt that certain transfer pricing arrangements may fall under DPT, registering to the PDCF is a valuable alternative for taxpayers to consider. It is recognised that this is not a “one size fits all” solution, and all options and avenues should be considered before a decision is made.

We have a team of tax dispute resolution specialists with a great deal of experience of working numerous HMRC enquiries and PDCF disclosures. If you receive a nudge letter, would like to discuss your options or have any questions on the facility in general, please contact us, we would be happy to assist you.

Our UK tax dispute and resolution team has extensive expertise and experience and is on hand and happy to help with any questions you may have, so feel free to phone or submit an enquiry.

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