The profit diversion compliance facility enables multinationals to bring their tax affairs up to date openly and efficiently, giving them ‘certainty for the past and a low risk outcome for profit diversion in the future'. HMRC aims to respond to proposals within 3 months of submission, provided a full and accurate disclosure is made.

Upon registering, companies must submit a report within six months unless HMRC agrees a longer period and make payments in line with the proposal ‘when or before the report is submitted’.

HMRC has warned that it has identified a number of businesses ‘in a variety of business sectors which could be diverting profits, and expects to identify more’, and that if the diverted profits tax applies they could face a potential charge ‘and depending on the cause of any inaccuracies or failures to notify, penalties, civil or criminal investigations, as appropriate’.

The facility is based on findings by HMRC that some multinational enterprises have adopted cross-border pricing arrangements that are not consistent with the OECD’s framework package on base erosion and profit shifting (BEPS). This, it says, could be due to ‘insufficient understanding’ on the nature of business functions, or due to the business changing over time and becoming ‘different from that originally assumed or intended’.

Dawn Register, tax dispute resolution partner at BDO, notes that there is ‘no amnesty element to the facility’ and that outstanding taxes will need to be paid, including late payment interest and financial penalties.

This, she says, indicates that HMRC ‘expects most companies using the facility to disclose additional corporation tax as a result of their transfer pricing policies’, and that the tax authority is taking an increasingly tough stance towards diverted profits:

‘We expect HMRC to issue so-called ‘nudge’ letters to businesses it considers should either use the facility, or which need to review their affairs and potentially make a voluntary disclosure.

‘Businesses will need to carefully assess whether or not the facility is in fact the best way to approach HMRC. It is not the only process for making a voluntary disclosure to HMRC. Given the risk of a more serious investigation, any affected business would be wise to seek expert tax advice prior to making any approach to HMRC.

‘HMRC is dedicating significant resources looking at these areas, primarily aimed at larger groups of companies. Ignoring a letter from HMRC on this issue is clearly not advisable.’

According to Pinsent Masons, the tax burden on businesses from the diverted profits tax is significantly higher than first anticipated. The £388m collected in 2017/18 exceeded the forecasted £360m that the Exchequer anticipated would be the impact of the tax.

Report by James Bunney