HMRC guidance on Advance Pricing Agreements: important updates

HMRC update APA guidance to reflect evolutions in their approach, including the interaction with live enquiries and PDCF’s.

New HMRC APA guidance clarifies admissibility

HMRC have updated their Statement of Practice on Advance Pricing Agreements (APAs) providing guidance on how they interpret the APA legislation and operate the UK APA Programme. Of particular note are HMRC’s clarifications about the impact of live enquiry and Profit Diversion Compliance Facility (PDCF) processes on the timing of admission to their APA programme and the inclusion of timings which HMRC and taxpayers should adhere to as part of the implementation process.

HMRC have recently published an updated APA Statement of Practice in their International Manual at INTM 422000 et seq (APA guidance). The APA guidance changes take into account the evolution in HMRC’s approach in recent years and the OECD project on APA best practices which resulted in the publication of the Bilateral Advance Pricing Arrangement Manual (BAPAM) in September 2022. 

The updates to the HMRC APA guidance which we consider the most significant are explained below and are potentially relevant both to UK businesses considering seeking a new APA and those with live APAs in progress.

Impact of unresolved prior period tax audits and PDCF processes

HMRC have made important updates which address the interaction between APA applications and unresolved HMRC or overseas tax authority enquiries into prior period tax returns.

The revised guidance confirms that an overseas audit does not automatically rule out an APA, but HMRC would need to assess if there is a realistic opportunity of meaningful engagement on the APA within a reasonable timescale. HMRC would not admit an APA application which would be paused during the audit for an indefinite timeframe.

Updates to the guidance also reflect recent HMRC practices to not accept an APA request where there are unresolved prior year HMRC enquiries into the proposed covered transactions or other transactions that may materially impact on the proposed covered transactions, irrespective of whether the APA is seeking a roll back to those periods or not. This also extends to cases where HMRC have written to a business asking them to consider registering for the PDCF before a formal interest in an APA has been expressed.

It is notable that under the updated guidance HMRC clarify they have a level of flexibility to allow access to an APA where there is an overseas audit (and a willing overseas tax administration), but HMRC are not indicating any flexibility to reciprocate when there is an unresolved UK enquiry.

The extension to the PDCF is also an interesting development given that the HMRC PDCF ‘nudge letters’ are careful to not specify particular arrangements or parties in order that PDCF registrations can be viewed as unprompted.

Admission of unilateral APAs

Consistent with KPMG’s experiences, HMRC explicitly confirm in the updated APA guidance that in cases involving a treaty partner country known to have an APA programme they expect businesses seeking a unilateral APA to have first approached the treaty partner to engage on a bilateral basis. In such cases any unilateral APA would still be expected to be exchanged with the relevant treaty partner in accordance with HMRC’s exchange of information obligations. In practice we expect unilateral APAs in the UK to be very rare.

Expression of interest requirements

There are a number of clarificatory changes to the APA guidance concerning the pre-filing stage (also known as Expression of Interest (EoI)) in the UK. The guidance now expressly requires that for bilateral/multilateral APAs, businesses should approach each territory to discuss their intention for a bilateral/multilateral APA.

The explanation of what information should be provided to HMRC as part of the EoI meeting has been further elaborated. The business seeking an APA is expected to provide brief details of any APA or Mutual Agreement Procedure (MAP) requests, APA agreements or other rulings, in the UK or overseas, in respect of the covered transactions or transactions with the same, or substantially the same fact pattern. This includes requests made to third states, made by either of the parties to the proposed APA.

Further updates explain what businesses can expect from HMRC as part of the EoI process. Whilst HMRC confirm that they would not dictate what methodology must be included in the application, HMRC explain that they may highlight areas of concern in relation to the proposal.

Formal application

BAPAM suggests that there should be a prescribed timeframe of 30 days to accept or reject APA applications to ensure both tax administrations conclude and notify the relevant taxpayer on a timely basis. HMRC have added this to the guidance, but our expectation is that HMRC will continue to indicate acceptance from their perspective at (or shortly after) the EoI meeting. It remains to be seen whether there will now be an additional confirmation of acceptance step after HMRC have received and conducted an initial review of the application document.

Evaluation, timeline and process

Updates indicate that HMRC will: (i) seek to agree a timeline with the other competent authority to ensure the APA progresses adequately and as efficiently as possible; and (ii) work with the other competent authority to agree joint information requests in the hope that such requests will lessen duplication for the business.

It is now expressly stated in the guidance that HMRC expect that the tax computation for each covered period will be prepared based on the position put forward in the APA application, until such time that the APA is concluded and any variation from the proposed pricing is known. This aligns with the best practice set out in the OECD BAPAM. We have seen APA cases where filing on a different basis by some businesses has caused challenges during the APA negotiations and the clarification by HMRC to put the position beyond any doubt is therefore useful.

Reaching agreement

HMRC now indicate they will target 30 months to reach agreement, which aligns with the OECD BAPAM best practice, whilst noting that experience shows bilateral or multilateral agreements can take 36 months or longer. Once cases go beyond the 30 months target, senior members of the team will review the case with a view to progressing it.

The guidance clarifies that for bilateral APAs any agreement is first reached with the other administration and then put to the UK business as a take it or leave it proposal. If the UK business does not agree the terms, then normally the process will be terminated. Only in exceptional circumstances might HMRC consider revisiting the proposed competent authority agreement and only if the other competent authority is also amenable. In practice, HMRC will provide updates during the negotiation process on the positions being taken and direction of travel in negotiations so we would not expect this to be a problem.

Withdrawal from the APA process

Additional guidance has been added on the circumstances in which HMRC would withdraw from an APA process or request that a new application is made.

Lack of response or active engagement from the other tax administration may lead to HMRC terminating the process, but there is reassurance this would not be until all reasonable efforts have been made to encourage that administration to progress the case.  

The guidance now states that HMRC may also request that a new application is made if there has been a suspension or similar pausing of active progress on the APA for at least six months. Again, this will depend on the circumstances, which is important given delays in the process may have nothing to do with the taxpayer.

The agreement between the taxpayer and HMRC, which is a requirement under the APA legislation, should now be signed within 60 days of the competent authority mutual agreement being notified to the business. It is understandable, given the impact that completing the paperwork has on APA time-take statistics and resources, that HMRC would want to be more specific on their expectations and the 60 days should help focus minds for all parties.

APA monitoring and review

A notable addition to the guidance is that for covered periods where the tax returns are already filed, the business is required to lodge an Annual Report within 90 days from the date the domestic agreement is signed. As the Annual Report is intended to be lodged with the company tax return it appears that any amendments to previously filed tax returns (for APA covered periods) required to reflect the agreed transfer pricing methodology would also need to be made within 90 days. Advance planning will be important and up-front dialogue with HMRC if more time is needed.

The guidance also provides additional detail on the recommended contents for the Annual Report.

Concluding remarks

HMRC statistics show APAs remain a popular means for large multinationals to obtain certainty on transfer pricing issues, with 40 new applications made in FY21-22 (the largest number seen since FY15-16). With the increasing complexity of transfer pricing issues faced by multinationals, we expect demand for APAs will grow so the additional clarifications made by HMRC in their updates are helpful. 

The updates also usefully highlight practical challenges that may be faced with some treaty partners and with UK audits, factors warranting early consideration when considering options for certainty.