Article:

Diverted profits tax: Have HMRC ‘nudged’ you about your transfer pricing?

08 October 2021

HMRC’s Profit Diversion Compliance Facility (PDCF) is a disclosure facility that opened in January 2019 offering groups the ability to clear up any historic non-compliance with the Transfer Pricing and Diverted Profits Tax regimes plus any other non-compliance, in a managed way. The intended benefits include that any disclosure is treated as ‘unprompted’ with the prospect of lower financial penalties plus a managed agreed process with HMRC.

The PDCF is still ongoing and we understand another batch of ‘nudge’ letters is to be issued imminently. For larger businesses above the €750m consolidated turnover threshold, HMRC have analysed Country by Country Reports (CbCRs) to help identify candidates for a nudge letter. However, we are increasingly seeing businesses who are not ‘large’ receiving a letter and we anticipate HMRC’s next batch of letters will have a greater focus on businesses within this category. 

This increased focus on businesses below the ‘large’ threshold would be consistent with HMRC’s consultation paper proposing changes to the transfer pricing documentation requirements. These changes would result in all businesses within the transfer pricing rules (i.e. not just ‘large’ businesses) having to produce an International Dealings Schedule (IDS). HMRC is expected to analyse and interrogate IDSs by developing the automated risk assessing tools already applied to Country by Country Reports.

Registering for the PDCF to clear the decks

If your group has concerns over its historic transfer pricing you don’t need to wait for a nudge letter from HMRC to register for the PDCF: indeed we understand that a number of groups have recently proactively approached HMRC to notify their intention to register. To register for the PDCF it is not necessary to know for certain at that time that there has been non-compliance and that there is additional tax to pay. Instead, the group can register and during the registration meeting with HMRC it can propose the areas it intends to investigate and report on and HMRC may at that meeting share any specific risks it has identified that have not been raised by the group.

In our experience groups have welcomed the opportunity to obtain certainty on the group’s historic tax compliance in a collaborative and managed process that the PDCF offers.

We have a dedicated team of Transfer Pricing and ex-HMRC Dispute Resolution specialists with the combined technical and investigation skills to support groups through the risk assessment and report preparation. If you would like to discuss your group’s position, please get in touch.

Read more about the Profit Diversion Compliance Facility