HMRC launches voluntary profit diversion disclosure facility


Peter Courtney

Peter Courtney

Tax Director and Head of International Tax


HMRC has just launched the Profit Diversion Compliance voluntary disclosure facility. This is aimed at multinational enterprises (MNE) with structures and arrangements targeted by the Diverted Profit Tax (DPT) legislation.

The DPT legislation seeks to address two situations:

  1. UK companies that divert profits from the UK to lower taxed jurisdictions using entities or transactions that lack economic substance.   
  2. Foreign companies carrying on activity in the UK in a way designed to ensure that no UK taxable presence (UK Permanent Establishment) is created.

The UK’s DPT is charged at 25% on profits considered to be artificially diverted from the UK, SMEs as defined under EU rules are exempted from this tax.

What businesses fall into the scope?

HMRC has now indicated that they have identified a significant number of MNEs that may be diverting profits out of the UK and have invested in new teams in order to investigate these groups. The businesses identified by HMRC operate across a wide variety of sectors and interestingly, while the DPT compliance effort has to date focused largely on the UK’s largest businesses, include a significant number dealt with by HMRC’s Mid-Size businesses directorate.

The new facility gives those groups with arrangements within the scope of the DPT legislation and not already under investigation by HMRC in relation to profit diversion, the opportunity to review their Transfer Pricing policies and change them where necessary. MNEs in scope are invited to prepare a report including proposals for settlement. 

The advantages of using the facility

Any group with arrangements that fall within the scope of the DPT legislation should consider this disclosure facility carefully as it provides a number of potential advantages:

  • DPT enquiries are heavily fact dependent and often involve extensive and intrusive information gathering including email reviews and interviews with senior staff. Producing a report under this new facility allows MNEs to take control of the initial investigation and manage the impact on the business.
  • HMRC aims to respond to proposals within three months and expects to accept the majority of proposals whereas DPT investigations can take several years.
  • Acceptance of a proposal made under the facility will provide certainty for the past and a low risk indication going forwards
  • If a disclosure is made before any HMRC enquiry is launched, then any penalty will be considered on an unprompted disclosure basis potentially reducing any penalty applicable to nil.

Specialist tax advice is important

However, it’s important to note that any additional tax that is identified in a disclosure will need to be paid in full along with interest and, where applicable, penalties so it’s important that specialist tax advice is taken before engaging with HMRC on Diverted Profits Tax or Transfer Pricing.

If you receive a letter from HMRC in relation to this facility or DPT and would like to discuss whether your group should consider using this facility or more generally the robustness of your transfer pricing arrangements please get in touch with me, Peter Courtney at: peter.courtney@jcca.co.uk.