HMRC introduces a new Profit Diversion Compliance Facility
HMRC appears to have concluded that significant numbers of businesses have yet to align their transfer pricing policies with the transfer pricing outcomes of the OECD/G20 BEPS Project. HMRC has accordingly introduced a new Profit Diversion Compliance Facility (PDCF) to encourage multinational enterprises (MNEs) to make voluntary disclosures about any transfer pricing arrangements that fall within the scope of the Diverted Profits Tax (DPT) legislation.
MNEs are encouraged to review their transfer pricing policies, change them if appropriate, and submit a report with a proposal to settle any tax, interest and penalties due. Reports made by MNEs that are not already subject to an investigation by HMRC will be treated as unprompted disclosures, and will thereby attract lower minimum penalties. In certain circumstances penalties will be reduced to nil as long as accurate disclosure is made by 31 December 2019. HMRC also states that tax-related criminal investigations will be highly unlikely if a full and accurate disclosure is made.
HMRC has stated that it will contact businesses it has identified, through its ongoing data analysis, as having a combination of features associated with profit diversion. Using the PDCF may be beneficial if you are contacted by HMRC, or if you feel you may be at risk of a DPT investigation.
Is this relevant to you?
The PDCF guidance provides useful insight into HMRC’s views on what situations give rise to profit diversion risk, how a transfer analysis should be carried out, and what evidence is required to support intragroup transfer pricing policies.
HMRC’s indicators of Profit Diversion Risk include situations where:
- risks are contractually allocated to non-UK entities which cannot in fact exercise meaningful control over such risks;
- no or insufficient profits are allocated to UK entities carrying out high-value functions; or
- no or insufficient profits are allocated to UK entities which perform important functions, control economically significant risks, or contribute assets, in relation to valuable intangibles legally owned by non-UK entities.
How JHA can help
Given HMRC’s approach, you may wish to seek a second, independent view on whether your current transfer pricing filing position is robust. If you do, we can offer unique expertise in assessing whether you may be at risk of a transfer pricing related tax charge and, if so, how best to present your case to HMRC under the PDCF.
JHA’s tax disputes team has vast experience of dealing with HMRC enquiries and investigations in transfer pricing disputes, having advised on some of the highest profile and value disputes in recent years. Uniquely, we are top ranked in both Chambers & Partners and Legal 500 for tax disputes generally. We bring together in one firm specialist tax QCs, experienced tax disputes solicitors, and forensic accountants. We are independent of, but have good relations with, the Big 4 and other leading accounting firms. We consider that we are exceptionally well placed to help guide you through any report you wish to make under the PDCF, whether with your internal team or working in conjunction with your other tax advisors.
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Tax-Related Measures in the Autumn Statement 2022
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This note focuses on tax measures included as part of that statement.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).