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Insight into HMRC’s Profit Diversion Compliance Facility

Insight into HMRC’s Profit Diversion Compliance Facilit

HMRC officials urge taxpayers to be proactive with the Profit Diversion Compliance Facility guidance.



Daniel Head

Partner, National Head of Transfer Pricing

KPMG in the UK


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On 26 February KPMG UK hosted the ‘Future of Tax Authority Engagement’ seminar for clients with the participation of HMRC and a day later, HMRC held a webinar regarding their new Profit Diversion Compliance Facility (Facility). A variety of queries relating to the Facility and HMRC investigations were tackled during both sessions which shed further light on HMRC’s focus and the intended operation of the Facility. HMRC are clearly expecting Multi-National Enterprises (MNEs) to urgently review their cross border arrangements in light of the Facility guidance issued on 10 January 2019 and see large amounts of tax still at risk across many MNEs and sectors.

HMRC launched the Facility to encourage MNEs to bring their tax affairs up-to-date (and pay any historical tax, interest and penalties due) before they are investigated. Our Tax Matters Digest analysis of the main features of the Facility of 11 January 2019 may be accessed here.

HMRC’s profit diversion focus is on getting the right amount of UK tax from any MNEs that are not BEPS compliant and their investigations are far wider than just potential Diverted Profits Tax (DPT) liabilities. HMRC have undertaken over 100 investigations to date which produced significant yield mainly as a result of transfer pricing analysis that:

• Does not reflect what happens on the ground; and/ or
• Is not consistent with the current OECD Transfer Pricing Guidelines.

Key takeaways from the HMRC statements last week were the following:

The onus is very much on the business to now review their arrangements in light of the Facility guidance not rely on prior Transfer Pricing documentation or discussions nor wait for a ‘nudge’.

HMRC have found that historic transfer pricing documentation has too often not been of sufficient standard and that significant amounts of additional UK tax are often found to be due. In January they published detailed Facility guidance setting out some key risk indicators, findings from recent investigations, common misconceptions and incorrect assumptions about DPT and transfer pricing and the level of evidence and fact testing they expect.

HMRC were clear that the onus is therefore now on MNEs to review their arrangements and disclose all liabilities or face the consequences. HMRC may not forewarn MNEs of an intended investigation as all businesses have the opportunity to read the guidance; nor if nudging a MNE will they say what the specific relevant risks identified are. The latter point is reflective of the fact that the Facility gives ‘unprompted’ penalty treatment and that it is the MNE that has full knowledge of their facts.

HMRC’s profiling for profit diversion risks utilises both technology and manual processes. HMRC confirmed that the outcome of prior discussions and enquiries with HMRC cannot be relied upon.

HMRC are undergoing a process of continuous improvement and investment in tackling profit diversion and exploring new ways of tackling issues including the use of new technology, legislation and information sources.

Some of HMRC’s high risk MNEs nudged were those where discussions had previously taken place, including in response to DPT notification, and this may have led to no further action at the time. HMRC are now using additional information and new insights and approaches to the issues building on clarified rules and findings from investigations they have found illuminating such as e-mail reviews.

Proactivity remains key

HMRC’s statements reinforced the need for MNEs to urgently consider the implications of the Facility guidance. Whilst HMRC ultimately expect a proportionate and risk-based response, they were clear that historic approaches were often not appropriate and need diligent reviewing in light of the new guidance.

Should you wish to find out more about the Facility and how KPMG may assist you, please get in touch with our contacts below.

For further information please contact:

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