2019 looks to be the year that HMRC crackdown on tax avoidance once and for all, making sure that larger companies who have been hoarding wealth and avoiding tax by diverting profits finally get their comeuppance. One of the ways in which tax avoidance is being tackled is with the profit diversion compliance facility.
What is diverted profits tax?
This tax is designed to target large multinationals who have been earning a lot of money in the UK, but diverting their profits overseas in order to avoid paying the right amount of tax in the countries that they operate in.
The profit is commonly sent overseas by manipulating transfer pricing. Transfer pricing refers to the way that transactions are conducted between different companies that are under common control in different countries. These transactions can be done at under or over value so that profits can be deflated in one company and inflated in another. Typically, an organisation will set its transfer pricing so that profits in its operations in high taxation countries are minimised or even eliminated – thereby avoiding corporation tax.
There are situations in which this can be an accident, in which case HMRC is happy to work with businesses to work out exactly how much they owe and reach a settlement. Some examples of where tax may be accidentally avoided through diverted profits are:
- Situations in which a business has grown and developed over time, but failed to update its internal accounting practices.
- Incidents where companies have miscalculated the value of their assets, or made incorrect assumptions relating to their worth.
- Situations where a business might accidentally undervalue tax contributions made by staff in the UK, and overvalue the tax contributions made by staff working overseas.
However, this legislation is also in force to target companies that deliberately funnel their wealth and profits to headquarters based in very low, or no, tax countries. An example of this would be Amazon, which has its headquarters in Luxembourg but all of its human resources staff in the UK. HMRC intend to target all large multinational enterprises (MNE) in their investigations, so that all incidents of tax avoidance in this way are able to be uncovered.
DPT taxes profits at 25%, 5% higher than standard corporation tax, acting as both a deterrent for companies who might want to ‘risk it’ as well as a punitive measure for those who have been getting away without paying the right tax so far.
What is the Profit Diversion Compliance Facility?
For MNEs who want to stay ahead of the curve and look at their taxes before the new rules come into effect on 31st December 2019, the profit diversion compliance facility is available to help them to do so. This is a useful report which allows them to declare their earnings, paid taxes and anything that may have gone unpaid, ensuring that they are compliant with HMRC and the law. HMRC are also happy to work with these businesses, helping them to review and update their processes to ensure that everything is running smoothly going forward.
MNEs do not have to worry about using the profit diversion compliance facility if they are absolutely certain that they have kept all of their taxes up to date and paid everything that they owe, although they should be aware that in this case HMRC will investigate to make sure.
The final date to register with HMRC is 31st December but companies are able to register at any point, and 6 months from that date to compile and submit and full disclosure report.
The report will cover:
- Facts and evidence – Companies will put together a complete list of financial outgoings, taxes paid and anything else that is relevant, as well as evidence to back it up.
- Application of tax law to the facts – how relevant laws have been applied to the facts presented, and what conclusions have been drawn from these.
- Penalties already administered – how bad behaviours have been investigated and dealt with
- Proposal – how the company intends to settle any outstanding tax liabilities as well as penalties and interest
- Declaration – will need to be signed by a senior financial officer
- Supporting documents – any evidence or additional information
The report will need to be submitted with any back taxes that are owed, as well as any appropriate penalty fees. It is then up to HMRC to review this and decide whether this was the right amount and if they agree with the decision come to by the report.
If businesses have difficulty with any part of the process, they are able to contact HMRC, who will meet and talk with businesses who register for the facility to offer advice and support.
Why use the Profit Diversion Compliance Facility?
If HMRC are already conducting reviews, why should any business apply for the profit diversion compliance facility? The fact is that if you are a multinational enterprise with a subsidiary in a low income tax jurisdiction, chances are that you are already on HMRC’s list of companies to investigate. Thus, it is useful to get ahead of it for the following reasons:
- Shows willing to deal with any issues yourself, demonstrating compliance and a wish to follow the law.
- HMRC will not start investigating, or will put investigations that are already under way on hold, on any businesses who registers to make a disclosure before 31st December. This gives the business an opportunity to deal with it in their own time.
- Voluntary disclosure may encourage HMRC to limit the penalties that are applied.
- HMRC will not publicly release information about companies who have been penalised or deliberate tax avoidance if they voluntarily apply for the PDCF.
- HMRC may avoid criminal prosecution on those who have deliberately avoided tax if they provide a full and accurate disclosure of their own free will.
What happens after you submit your report?
- HMRC will contact you to let you know it has your report within 14 days. There is no need to chase up your report before this.
- HMRC may contact you to go through any issues or queries relating to your report, and you may be asked to provide more evidence or answer further questions.
- As long as you have paid any tax you believe you owe, HMRC will respond to your proposal within 3 months to let you know if it has been accepted or not.
- HMRC will send you a letter of acceptance if they are happy that your report is accurate.
If HMRC do not accept your report, they will be in further contact to arrange the next steps. This may be directly between your business and HMRC, or a full investigation may be required.
Further information and help
It is unlikely that your company need worry about this, as it only really applies to multi nationals – however HMRC seem to be on the war path currently and if you are affected by any taxation or accounting issues then please call us on 01473 744 700 or email us on firstname.lastname@example.org to discuss further.