MNEs should look out for the second tranche of targeted PDCF ‘nudge’ letters this week as HMRC’s crackdown on profit diversion gains momentum.
HMRC have indicated that their second tranche of Profit Diversion Compliance Facility (PDCF) nudge letters will be issued this week encouraging a further batch of MNEs to register for the PDCF and bring their cross-border tax affairs and arrangements up to date. This development follows the initial success HMRC enjoyed when most of the recipients of the first tranche, issued in late January 2019, registered. Many of those original MNEs were surprised by the nudge and businesses need to look out for this correspondence and consider now how to best respond to HMRC’s strategy for tackling arrangements that reduce UK taxable profits as it appears to be gaining traction.
What is the PDCF?
HMRC launched the PDCF in January 2019 after finding in a high proportion of their investigations that MNE’s tax arrangements did not reflect what was actually happening on the ground and that Transfer Pricing policies were not in accordance with the OECD Transfer Pricing Guidelines as clarified through the OECD Base Erosion and Profit Shifting Project.
Registration for the PDCF enables MNEs to review and change arrangements, without the burden of an HMRC investigation in the review period, putting forward a report with proposals to pay any additional tax, interest and penalties due. In return they can expect to enjoy a number of benefits including a more efficient and controlled investigation and likely more favourable penalty treatment from disclosing.
Although HMRC have been clear that they will not always nudge businesses being considered for investigation for profit diversion, they are periodically issuing targeted nudge letters in small targeted tranches to some perceived high-risk businesses, encouraging them to consider registering.
Why is it important to look out for these new nudges?
Implicit in HMRC issuing nudge letters is that failure to register will generally result in an HMRC investigation.
The first tranche of nudge letters allowed a 90 day grace period before such an investigation could start and it is expected the next tranche will do the same and that most businesses nudged will continue to register for the PDCF.
Although this may sound like a lot of time, experience shows it can prove a challenge for many businesses to review their arrangements in light of the detailed HMRC PDCF guidance given the complexities that may be involved and make a decision internally on the best way forward within this period.
Failure to react quickly is likely to result in a more challenging engagement with HMRC, potentially including issuance of Diverted Profits Tax (DPT) Preliminary Charging Notices as HMRC look to take action before the DPT time limits for initial accounting periods expire.
Investigations of businesses previously nudged that did not register are already starting to be launched and HMRC have said that they expect to follow-up the second tranche of letters even more quickly. It is therefore important to look out for the letters arriving, and urgently react, in order to fully utilise the period allowed by HMRC to make a well-informed decision on how to best move forward and, if appropriate, plan the detailed work needed post-registration.
More generally it is advisable for all MNEs to ensure they are familiar with HMRC’s PDCF guidance and review their scenario now, not wait for a nudge that may not come before they are investigated by HMRC.
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