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Increasingly, businesses are discovering that transfer pricing enquiries are more likely to be part of a much wider investigation by HMRC into ‘profit diversion’. This type of investigation may start following a Diverted Profits Tax notification, but can be very wide-ranging covering a range of cross-border issues from company residence to hybrids, but will usually be resolved through an adjustment to the transfer pricing. Another feature of these investigations is that they are highly forensic in nature and large amounts of evidence will be requested from interviews of senior people to reviews of emails.

Given the large number of businesses now on HMRC’s list of potential cases of profit diversion, HMRC launched the Profit Diversion Compliance Facility (“PDCF”) earlier this year as part of their strategy of ‘collaborative compliance’. Further information on the PDCF can be found on HMRC’s website and in our webcast with representatives of the senior PDCF team at HMRC.

Key features of the Profit Diversion Compliance Facility

The PDCF provides an opportunity for businesses to disclose any profit-diverting arrangements and structures that might be caught by DPT rules and to get their affairs up to date with some protection from penalties and a low risk outcome for the future.

Businesses that register for the PDCF must not already be under enquiry by HMRC and have to submit a disclosure report within 6 months of registration, including a proposal to settle any additional tax liability. HMRC will respond within 3 months and their stated intention is to accept the majority of reports and settlement proposals.