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HMRC collects £70m from multinationals via profit diversion compliance facility

UK tax authority HM Revenue & Customs (HMRC) has collected more than £70 million from multinational businesses in the year to 31 March 2023 using its powers to pursue tax on profits it claims are diverted overseas, according to figures obtained by Pinsent Masons.

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.

  • Total value of previously unpaid corporation tax liabilities disclosed to HMRC through its Profit Diversion Compliance Facility (PDCF)

    Companies are declaring underpaid tax through HMRC's voluntary scheme

    The UK tax authority's Profit Diversion Compliance Facility is designed to allow businesses to voluntarily disclose structures or arrangements that might fall foul of the Diverted Profits Tax, which has a higher tax rate than mainstream corporation tax, or transfer pricing. It is proving successful in encouraging companies and HMRC to resolve disputes.

Sam Wardleworth, tax expert at Pinsent Masons, said enabling businesses to resolve their tax affairs in an expedited and collaborative manner is a key part of HMRC’s strategy to reduce the amount of tax lost through what it sees as profit-shifting. “HMRC has been quite successful in persuading multinationals to come forward voluntarily and to disclose profits that it thinks should have been taxed in the UK in the past and to regularise their position for the future. The alternative is a costly tax investigation, which both businesses and HMRC would prefer to avoid.”

“Businesses that wait for HMRC to investigate them are more likely to be hit with higher ‘geared penalties’ because the percentage penalty applied to the unpaid tax is higher where disclosure is prompted by HMRC. That can quickly become very expensive. Proactively engaging with HMRC to deal with the problem is likely to be a far wiser approach. The benefits of using the Profit Diversion Compliance Facility are clear – it generally takes less time and costs less than an investigation and often results in lower penalties,” Wardleworth said.

He added that HMRC has also increased the number of investigations it has opened into businesses’ use of transfer pricing. It opened 147 new investigations in the year to 31 March 2023, up 18% on 125 investigations opened a year earlier and up 40% on the 105 investigations opened two years ago.

  • The number of Transfer Pricing investigations opened by HMRC in recent years

    After a 2020 peak, investigations are rising again

    The number of Transfer Pricing investigations opened by HMRC's Mid-sized Business (MSB) division within Wealthy & Mid-sized Business Directorate, and Large Business (LB) Directorate is on the increase after a spike in 2020.

“HMRC would strongly prefer businesses to contact it voluntarily to regularise their tax affairs, but it is certainly not afraid to investigate those who don’t. These figures show that there is a continued focus in HMRC on ensuring that the UK collects what they see as the correct amount of tax from multi-national businesses,” Wardleworth said.

He added: “Other recent developments, including the possibility of incorporating diverted profits tax into the corporation tax regime and the introduction of the multinational top up tax, will ensure that multinationals continue to have challenges in this arena. They should remain focused on fixing any potential issues as they arise rather than waiting for HMRC to find them.”

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