INTM489833 - Diverted Profits Tax: customer engagement with HMRC: introduction

Government is committed to addressing tax avoidance and aggressive tax planning by multinationals. This commitment is shown by, for example, the leading role taken by the UK in the OECD-G20 Base Erosion and Profit (BEPS) project and the introduction of domestic tax measures such as the DPT.

Addressing base erosion and profit shifting is therefore a clear priority for HMRC and is supported by specific Government investment.

Funding announced in Autumn Statement 2014 has been used to strengthen HMRC’s response to large business tax risks by recruiting additional tax professionals to create a flexible national resource – the Large Business Task Force (LB TF) whose remit includes identifying and assessing international and other tax risks and working with Customer Compliance Managers (CCMs) and case teams to investigate those risks. In early 2018 the LB TF merged with the LB Strategic Risk Unit to form the Large Business National Compliance (LB NC) group. A Diverted Profits Team of around 40 experienced specialists was created to work with CCMs and tax specialists to look across all business sectors and consider whether companies have used profit shifting structures which HMRC should challenge using transfer pricing, DPT or other legislation.

HMRC committed further resources in 2017 by creating additional national teams. These teams bring together the necessary investigative, technical and leadership skills from various Directorates to investigate arrangements to avoid UK tax by diverting profits involving companies in both HMRC’s Large Business and Mid-Sized populations which are outside the scope of the SME exemption.

HMRC prefers companies to fully disclose significant tax uncertainties or inaccuracies and to ensure compliance with tax law, and will work co-operatively, proactively and transparently with companies to resolve any tax uncertainties and risks. In January 2019, HMRC introduced the Profit Diversion Compliance Facility (PDCF) for multinational enterprises using arrangements targeted by DPT to give them the opportunity to bring their tax affairs up to date in an efficient manner. The new facility is designed to encourage multinational enterprises with arrangements that might fall within its scope to review both the design and implementation of their TP policies, change them if appropriate, and use the facility to put forward a report with proposals to pay any additional tax, interest and, where applicable, penalties due.

In addition to making the most of information already available, HMRC is also working more closely with other tax administrations to exchange information under the terms of tax treaties, including with its partners in the expanding JITSIC network, to address tax avoidance and aggressive tax planning across borders. This will inform HMRC’s approach to administering DPT and to applying other countermeasures to profit shifting such as transfer pricing, targeted anti-avoidance rules or other legislation.

What companies can expect from HMRC

HMRC values having an open and transparent relationship with customers and encourages them to raise significant compliance issues in real time: this is reflected in its approach to DPT. HMRC will be open with companies about their tax risks and engage with them to gain a better understanding.

There is no clearance procedure for DPT, but it may be possible for HMRC to provide a view on whether transactions are likely to fall within the scope of DPT in certain circumstances covered in the guidance. This will require a considerable amount of resource from the company and HMRC to obtain the necessary assurance about the level of DPT risk. It will only be justified where there are particular reasons for expending the resources.

HMRC will not as a matter of routine ask customers to supply information to demonstrate that they are not within the scope of DPT until an initial risk review has been carried out and there is good reason to consider that they may be chargeable to DPT.

Our engagement with customers with regard to DPT will be in accordance with HMRC’s Litigation and Settlement Strategy (LSS). This outlines the framework within which HMRC handles and resolves tax disputes through civil law processes and procedures in accordance with the law. It applies irrespective of whether the dispute is resolved by agreement with the customer or through litigation.

HMRC’s risk identification and assessment activities

As with other areas of tax, HMRC uses data profiling and intelligence gathered from other sources across companies in all sectors to identify customers with features which could indicate profit diversion.

HMRC will carry out an initial risk review of companies it considers may fall within the scope of DPT. This will form part of a wider risk assessment of transfer pricing and other international risks and will use information already held by the department and public source information. It will also consider any information and analysis provided by the company as a result of real time engagement. HMRC will not usually request information at this stage. These initial risk reviews are considered by experienced specialists.

Where those specialists determine the company to be ‘Low’ risk of diverted profits and there is already discussion with the company about the applicability of DPT, HMRC may communicate to the company that no further engagement on DPT is currently planned.

If the specialists consider a company is high risk for DPT and decide to authorise opening an investigation, HMRC would then consider whether there are sufficient resources available to progress that investigation at pace to meet DPT deadlines. If not, HMRC would wait until the necessary resources required to investigate the arrangements become available. As in other areas of compliance work, HMRC ‘resources to risk’ whereby resources are allocated first to the greatest risks. Factors taken into consideration in prioritisation decisions include: the estimated scale of the risk; the behaviours involved; whether the issue is novel or one which could set a wider precedent; whether there is already a ‘dispute’ as defined in HMRC’s Litigation and Settlement Strategy, and whether there are sufficient resources available to progress that investigation at pace to meet DPT deadlines.

If it cannot be determined whether there is a high or low risk of arrangements being within the scope of DPT, the specialists may ask the case team to contact the company for additional information and analysis to establish the position.

Those companies presenting the greatest risks will require more detailed risk assessment and investigation. HMRC’s preference will be to work openly and cooperatively with the company. We will want to evaluate and address other profit-shifting risks at the same time as considering whether the company is in scope for DPT. This is an efficient way for HMRC to deploy its resource while at the same time considering company’s compliance costs and providing more certainty than a piecemeal approach.

Uncooperative companies which appear to adopt an aggressive tax strategy can expect detailed investigation and robust challenges, and early consideration of whether a preliminary notice should be issued.

HMRC will consider the DPT implications of any Advance Pricing Agreement (“APA”) applications received in respect of the covered transaction.

HMRC governance

When the detailed risk assessment concludes that a preliminary notice should be considered this recommendation will be subject to governance. The LSS applies to all tax disputes resolved through civil procedures and to all decisions taken by HMRC in relation to such disputes. Decisions needed to give effect to the principles of the LSS in individual cases or for issues affecting a number of customers are taken within appropriate HMRC governance arrangements. Furthermore, where the case team wishes to recommend acceptance of a resolution proposal put forward by the customer this will be subject to governance by independent senior officers and potentially dispute resolution governance boards. Further details on HMRC’s governance procedures can be found at INTM489991.