The new Profit Diversion Compliance Facility is aimed at technology and e-commerce firms, and businesses which generate significant profits from intellectual property (IP) assets. Businesses that disclose their cross-border arrangements to HMRC under the new facility will be able to settle for a lower penalty than they would otherwise have been required to pay, and are less likely to face criminal investigation.
Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, described the new disclosure facility as "a last-chance saloon for multinational businesses to pay tax owed from diverting UK profits overseas".
"After this facility closes, we expect that HMRC will launch a concerted round of investigations into those companies that it has on its list," he said.
"HMRC views a lot of businesses as having untenable positions on tax. In particular, it is looking to target those tech and IP-rich businesses that run their European businesses from Luxembourg, the Netherlands and Ireland. Businesses should seriously consider coming forward under this facility to avoid the harsher penalties they'll face if they don't. HMRC's powers under the diverted profits tax are wide in scope, which means businesses will find it hard to challenge the findings of a properly-run HMRC investigation in this area," he said.
Businesses whose cross-border arrangements fall foul of UK tax rules could face penalties of up to 30% of the tax HMRC consider is owed if they do not disclose them through the new scheme, while HMRC has also indicated that it will be looking at fraud enquiries in appropriate cases, with penalties up to 100% or potential criminal investigation, Collins said.
The disclosure facility offers multinational businesses an opportunity to avoid paying any diverted profits tax (DPT) arising on existing arrangements, according to Collins. DPT was introduced in 2015 and is aimed at activities that divert profits away from the UK so that they are not subject to corporation tax. DPT is payable at 25%, compared to the 19% corporation tax rate.
The amount HMRC has collected from multinational businesses from DPT is significantly higher than first anticipated. HMRC collected £388 million in DPT in tax year 2017-18, higher than the £360m forecast by the Treasury.
Collins said that mid-market technology businesses would be a prime focus for the new disclosure facility, "as digital business models enable value to be created in places where a business has little physical presence and therefore a limited tax liability".
"There are potentially hundreds of businesses that HMRC has earmarked for this facility or subsequent investigations," he said.