Is your IP structure at risk of HMRC investigation?

Consider the profit diversion compliance facility

Profit diversion remains high on HMRC's agenda.  As a reminder of this, HMRC have launched a new Profit Diversion Compliance Facility (the PDCF), a  voluntary disclosure facility designed to encourage companies to disclose and correct any tax inaccuracies relating to profits diverted out of the UK.  IP will be a key focus for the PDCF. 

What structures are at risk?

The PDCF is aimed at multinational groups with subsidiaries located in jurisdictions with low (or no) tax.  The Diverted Profits Tax was introduced in 2015 in an attempt to prevent multinational groups from taking artificial steps to avoid creating a UK permanent establishment or eroding their UK tax base through the use of payments (for example, royalties) to parties outside the UK.  However HMRC believe that, despite this, many multinational groups are still not paying the correct amount of tax in the UK because of profit diversion.  Inaccuracies may arise as a result of outdated transfer pricing policies and businesses not being aware of a problem, as well as deliberate errors.

HMRC are particularly targeting technology and e-commerce companies that generate a significant profit from IP assets based overseas.  IP can generate significant profits for multinationals, a fact which has often led to the creation of IP "hubs" (i.e., the concentration of profits from the exploitation of IP in low tax jurisdictions). 

How does the PDCF work?

Companies have until 31 December 2019 to register for the PDCF.  Once registered, a company has six months to submit a full disclosure report.  Businesses that fail to register for the PDCF and are subsequently found to be non-compliant with their UK tax responsibilities will face higher penalties, possible criminal investigation and may be "named and shamed" if the behaviour is seen to be deliberate.

There are several benefits of using the PDCF:

  • HMRC will not start an investigation into any company registered for the PDCF before its disclosure is submitted;
  • The disclosure will be treated as unprompted and the company will therefore receive lower penalties;
  • If a deliberate inaccuracy is disclosed, HMRC will not publish details of any corporate entities involved;
  • The PDCF enables companies to bring their tax affairs up to date in an open and efficient way;
  • It is an accelerated process – HMRC aim to respond to submitted reports within three months; and
  • Although the PDCF does not provide automatic immunity from criminal investigation, HMRC have made it clear that they are unlikely to start a criminal investigation if a full and accurate disclosure is submitted

Be prepared

Any multinational group that holds valuable IP portfolios will be at risk if measures are not taken now to ensure their practices and policies can be justified.  Any companies that believe they may be at risk should consider taking advantage of the PDCF.

We are a specialist tax disputes and investigations team with a wealth of experience leading complex tax projects and supporting clients through HMRC disclosure facilities. We have previously assisted clients making disclosures under all of the major HMRC disclosure facilities including the Lichtenstein disclosure facility, the Crown dependency disclosure facility and the contractual disclosure facility.

Written by: Jack Prytherch, Associate, Bird & Bird