HMRC has announced a new Tax Disclosure Facility for companies and other relevant entities to disclose and correct areas where profit diversion may have occurred.
Profit diversion can take many forms. For example, transfer pricing policies implemented, can result in a shift of profits from one company to another. Also, overseas businesses (often online), or companies may be operating in the UK in such a way that they should be paying tax here.
The facility also covers cases where tax should have been withheld for example on the payment of royalties or interest to an overseas entity.
The facility provides companies with the opportunity to review their cross-border (and UK-only) transaction arrangements. Where appropriate, they can register up to 31 December 2019 and then make a disclosure afterwards. In return any resulting penalties will be lower than would generally be the case. Also, HMRC will not publish the details of the company.
Gary Ashford, Tax Partner at Harbottle & Lewis LLP said: “HMRC has been undertaking investigations into Diverted Profits Tax (DPT) and Transfer Pricing arrangements, and found that some companies have introduced transfer pricing policies that are significantly out of line with the OECD guidelines and even some that they believe have been done to deliberately shift profits, usually into jurisdictions with lower or no taxation.
“It is therefore very important to review the transactions to ensure they are compliant with the rules. If they are found to be deficient, I would recommend using the facility to correct matters before HMRC takes action. This is yet a further sign of the UK tightening the rules, particularly in the area of international tax.
“The timing of this new facility is particularly interesting, at the same time as many jurisdictions, including the UK Crown Dependencies and Overseas Territories, introduce legislation on substance requirements to address the concerns of the international community, including the EU, in relation to their code of conduct on business taxation. Also, the UK are in the process of introducing new Anti-Profit Fragmentation rules within the current Finance Bill.”
You can read the HMRC Profit Diversion Compliance Facility guidance here.