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In an environment where the common perception is of increased risk of enquiry by both HMRC and overseas tax administrations, demand for early certainty in relation to transfer pricing arrangements continues unabated. The Profit Diversion Compliance Facility (PDCF) gives certainty for the past but nothing more than a low risk outcome for profit diversion in the future. Internationally, the International Compliance Assurance Programme  (ICAP) provides a multilateral co-operative risk assessment and assurance process, again aimed at providing tax assurance rather than certainty, albeit that the assurance is forward looking (up to two tax filing periods following the ICAP assessment). But in the UK, the only mechanism for obtaining certainty in relation to transfer pricing for future periods remains the APA programme. 

Recent discussions with HMRC have confirmed HMRC’s commitment to maintaining an effective APA programme, supporting the UK’s competitiveness and promoting investment. But there has been a significant upturn in recent years in the time taken to agree APAs: the average time to reach agreement in 2019/20 was 37 months. With the focus internationally on effective dispute resolution (and clear improvements observed in the time taken to resolve Mutual Agreement Procedure (MAP) cases, which were below 23 months in 2019/20), it is clear that HMRC is having to consider whether any changes in practice are required in order to improve the efficiency of the APA programme. 

We are aware that HMRC has been declining cases where there is an open tax enquiry. But this is not a blanket restriction. Practical experience shows that this is only a factor where the focus of the UK enquiry materially impacts on the proposed covered transaction. Similarly, where overseas entities are routinely audited (including their transfer pricing arrangements), such audits will not necessarily prove a barrier to acceptance by HMRC into the APA programme. It is clearly worth an early discussion with HMRC in cases of doubt, given this subjectivity around access.

Another area that is clearly a focus for HMRC is the Annual Reports that form part of the taxpayer’s compliance with the terms of the APA. We have observed additional annual reporting requirements in recently negotiated APAs, and also far more attention paid to these by HMRC teams during the annual compliance cycle. It is apparent that the content and format of the Annual Reports required to date has not been consistent across all APAs, nor have they always been aligned with international practice. The importance of these reports should not be under-estimated, and it is likely that the reporting requirements will feature in an updated Statement of Practice in due course. The Annual Report forms part of the contractual agreement on which HMRC relies for confirmation that the terms of the APA have been complied with. Failure to comply with the terms of an APA could ultimately lead to its revocation, although the expectation is that modification of the APA could be agreed, if appropriate.

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