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Large multinational enterprises (MNEs) often structure their businesses and accounting practices to take advantage of lower taxes. One way to do this is to declare economic activities in another country that have more lenient taxation rules in place. MNEs then divert their profits to the particular jurisdictions where they have a presence in a bid to evade some of their tax liabilities. This is known as profit diversion.
The Diverted Profits Tax (DPT) was introduced to encourage business owners to change their behaviour and to pay the necessary amounts of Corporation Tax on profits that were in line with their economic activity. Businesses hit with DPT are taxed at percentages higher than standard corporation tax, which is why they have the incentive to alter their business structure to eliminate any potential tax increases.
DPT was put in force to target companies that deliberately funnel their profits to headquarters that are based in low or no-tax countries. However, HMRC are also aware that tax evasion via profit diversion can sometimes happen accidentally. It could happen in situations where businesses have failed to update their internal accounting practices or when they have made incorrect assumptions about their tax liability. But whatever the case, businesses should ensure compliance before they are hit with penalties.
In 2019, HMRC introduced a facility to tackle tax evasion via profit diversion, known as the Profit Diversion Compliance Facility; its purpose was simple: To crackdown on tax avoidance once and for all, stopping MNEs from hoarding wealth and evading tax by diverting their profits. MNEs with tax arrangements that are potentially linked to DPT can register to use the Facility to review their processes and to avoid the penalties that HMRC may propose if they are put under investigation for profit diversion.
Should You Use The Profit Diversion Compliance Facility?
You do not have to use the Profit Diversion Compliance Facility (PDCF) if you are certain that all of your taxes have been kept up to date and that you have paid everything you owe. However, it is worth noting that if you are an MNE, HMRC may still investigate your business to make sure you are being fully compliant.
If you suspect there may be inaccuracies within your tax accounting and if you want to demonstrate compliance, there are benefits to registering with the Facility set up by HMRC. By using this service, you will:
- Show willingness that you wish to follow the law
- Avoid an investigation if you submit a full disclosure report about your company taxes
- Potentially limit the penalties HMRC impose on you if you are willing to pay what is owed
- Avoid public disclosure about any tax avoidance
- Potentially avoid criminal prosecution if you provide full and accurate disclosure of any wrongful tax activities
If you are unsure whether you are at risk of a penalty, it’s worth reading the documentation that accompanies the Facility, as it lays out risk areas that businesses often fall under. If you wish to use the Facility, you need to be registered with HMRC, and you need to submit a report that outlines any potential tax irregularities and disclosures within six months of registering with the Facility. On submission of the report, you will need to cover any payments that are owed.
If you are already under investigation by HMRC, you may not be allowed to use the Facility. However, it is still worth querying with them to better understand your position.
What Does The Report Cover?
If you want to register with the Facility, there are various things that will need to go into the report you submit. The report should include:
- A list of financial outgoings, including taxes paid
- A proposal to settle any tax, interest, or penalties due
- A declaration of the information you have provided (signed by a senior financial officer)
- Supporting documents that provide evidence of additional information that is needed
Further information on the report and what needs to be covered can be gained by contacting HMRC or by speaking to our team of accountants.
What Happens After You Submit A Report To The PDCF?
After registering for the Facility and submitting your report to the Facility, HMRC will contact you to let you know that it has your report within 14 days of submission. After this time, they may get in touch with you to go through any issues or queries that relate to the report, and you may be asked to answer questions and provide further evidence.
If HMRC is happy that your report is accurate, you should receive a letter of acceptance. If they don’t accept your report, they will be in contact to let you know the next steps, which may include a full investigation into your business.
Before submitting the report, it is worth speaking to HMRC if there is anything you are unsure about. You can also speak to our accountancy team.
Further Information And Help
HMRC is looking to crack down on businesses that evade tax by diverting profits. This is understandably bad news for your organisation if you believe you may be under investigation for such activities. However, you can avoid an investigation and any penalties owed by following the guidelines set out by HMRC in relation to the Profit Diversion Compliance Facility.
We have discussed aspects related to the Facility in this post but for more information, visit the government website for more advice on what the Facility entails, why it might matter to you, and what you need to do if you intend to register. Visit this web page to learn more: https://www.gov.uk/government/publications/hmrc-profit-diversion-compliance-facility/profit-diversion-compliance-facility
If you need further information related to the Facility, your tax liabilities, or any other issue related to your accounting, speak to our team. We offer a wide range of accounting and tax services and are here to answer your questions if you have any queries or concerns. The last thing you want is a penalty imposed by HMRC for any tax inaccuracy, so it is better to correct any issues via our expert services before your business incurs any potential charges.