HMRC has been encouraging multinational companies to come forward and resolve their underpaid tax position through its ‘Profit Diversion Compliance Facility’. Using this facility, businesses can voluntarily disclose structures or arrangements that would fall foul of the diverted profits tax or transfer pricing, which has a higher tax rate than mainstream corporation tax, potentially securing reduced penalty rates.
Transfer pricing refers to the pricing of goods and services provided between connected parties. Where multinationals allocate their costs and income between different countries, transfer pricing could give rise to misallocation of taxable profits. The UK’s tax regime prevents this by applying the amount of profit or loss that would have been made between unconnected parties for tax purposes.
The diverted profits tax charges a higher rate of tax – currently 31% – where multinationals have diverted profits from the UK either by using entities or transactions that lack economic substance or by using arrangements that seek to avoid creating a taxable presence in the UK.
The Profit Diversion Compliance Facility was launched by HMRC in 2019 to encourage multinationals to review their transfer pricing arrangements and come forward to HMRC with a proposal to pay more tax. Its use has been gathering pace since its launch. The £70m in tax recovered through the facility in 2022-23 represented a rise of 3% on the £68m recovered in 2021-22 and a 79% increase on the £39m recovered in 2020-21.