Understanding HMRC's Profit Diversion Compliance Facility (PDCF)

Introduction to the PDCF

Launched in January 2019, the Profit Diversion Compliance Facility (PDCF) is HMRC's initiative aimed at encouraging businesses to voluntarily review and adjust their transfer pricing positions if the business thinks there is a need to do so. This proactive approach is designed to address HMRC’s concerns in relation to tax positions that they regard as profit diversion, particularly diverting profits from the UK to lower-taxed jurisdictions.

PDCF in numbers

• Since its inception, HMRC has issued 167 PDCF letters to multinational companies.
• A total of 121 companies have registered for the PDCF, with 76 cases resolved as of March 2023.
• The PDCF process has secured over GBP723 million in additional revenue, highlighting its effectiveness for HMRC as a way of addressing profit diversion.
• Impressively, 97% of final proposals submitted by businesses under the PDCF have been accepted by HMRC.
• The average time from registration to decision in resolved cases is approximately 20 months.

How the PDCF works

Voluntary participation: businesses not currently under HMRC enquiry can voluntarily register for the PDCF. This is a key feature to ensure lower penalties.

Self-assessment and disclosure: participants are expected to conduct a thorough review of their transfer pricing arrangements and international tax issues, before submitting a detailed disclosure report, proposing remedies for any high-risk tax positions.

HMRC's role: upon submission, HMRC will assess the report and provide a response within three months, offering resolution and clarity on the tax positions.

4 key benefits of registering for the PDCF

1. Efficient resolution: allows businesses to rectify any problems in their filed tax positions efficiently, avoiding the need for a full-scale HMRC investigation.
2. Control over the process: businesses have control over the evidence collection process and the timing of disclosures.
3. Certainty and lower risk: acceptance of a proposal by HMRC provides certainty over past tax positions and a lower risk profile for future profit diversion issues assuming no material changes to the business.
4. Favourable penalty terms: unprompted disclosures result in more favourable penalty terms.

Our experience with the PDCF

• We have seen positive feedback from businesses on the registration and pre-submission stages.
• The majority of tax risks identified by businesses at registration have been accepted by HMRC.
• Most final reports submitted have been accepted with minimal amendments.
• There has been positive feedback on dealing with more experienced transfer pricing and international tax specialists at HMRC.

The process of engaging with the PDCF

• Receipt of a “nudge” letter (optional¹): businesses may receive a “nudge” letter from HMRC encouraging them to consider the PDCF.
• Registration decision: businesses have 90 days to decide whether to register. No disclosure is required at this stage.
• Post-registration meeting: a meeting with HMRC is scheduled within a month of registration to discuss potential risk areas and agree on a work plan.
• Report submission: due six months after registration, the report outlines the facts around the identified risk areas and includes a proposal for settling any additional tax liabilities.

What happens if you don't register?

Choosing not to register after receiving a “nudge” letter is likely to lead to an HMRC investigation, which can be lengthy, invasive, and costly. In more serious cases, this could lead to criminal proceedings.

Our role in your PDCF journey

As tax advisors, we can assist you in evaluating your profit diversion risks and guide you through the process if you decide to engage with the PDCF. As a team we have extensive experience in successfully navigating clients through the PDCF process.

Future of the PDCF

As the PDCF process has been viewed as a success, “nudge” letters will continue to be issued to taxpayers on an ad hoc basis as and when HMRC’s risk profiling identifies a potential candidate.

Several businesses have also registered for the facility without the impetus of a “nudge” letter from HMRC, aiming to proactively resolve transfer pricing and international tax issues and achieve a low-risk status going forward. This forward-thinking approach can be attractive, particularly in scenarios like post-deal periods, where newly acquired or merged businesses have PDCF relevant risks / exposures or pre-deal / exit, enabling companies to resolve balance sheet provided items and enhance value. As transfer pricing and international tax compliance has become increasingly scrutinised, the trend towards voluntary engagement with tax authorities is expected to gain momentum. As such, we anticipate a continued rise in the number of businesses choosing to participate in the PDCF proactively.

HMRC have also suggested plans of expanding the current scope of the PDCF beyond profit diversion (ie transactions with a lower tax territory), but to also tackle more general transfer pricing risks as well as introducing similar facilities to address different tax risks – so watch this space!

If you would like to discuss your profit diversion risks or have any further queries about the PDCF process, please get in touch.

¹ Several businesses have voluntarily entered into the facility without a nudge letter in order to bring their tax affairs up to date.