In our experience the majority of nudged recipients decide to register (statistics previously released by HMRC suggest around two thirds), and this is often because the majority of MNEs prefer to collaborate with HMRC and have an open and constructive relationship. Generally it is not clear that there is any additional tax due at the time of registration, with that being confirmed in the follow-up work. Registration can allow for the MNE to have more control over how risks are addressed for efficiency and how long the process lasts versus a traditional audit. Often there is also an expectation of getting a better hearing via cooperation although it is obviously not possible to ascertain the counterfactual of how an audit would have progressed had they not registered.
A question we are commonly asked by recipients of nudge letters concerns whether the act of registering for the facility is to be interpreted as an admission of wrongdoing. The nudge letters emphasise the benefits of entering the facility but phrases the question to taxpayers as “How confident are you that your transfer pricing is appropriate and the Diverted Profits Tax (DPT) legislation does not apply to you?”. In our experience working with HMRC on these cases, they do recognise that Groups may exhibit risk indicators warranting attention whilst maintaining compliant policies and implementing those policies appropriately: in such cases the PDCF report serves to collate necessary analysis and evidence to resolve the position and we have seen that HMRC do accept nil adjustment proposals.
HMRC published independent market research in February 2023[3] which provides some useful data and should be read by anyone receiving a PDCF nudge letter. Generally, those that have been through the PDCF process found it expensive and intensive but beneficial versus the alternative of an HMRC investigation.
Businesses that have robust transfer pricing policies, supported by adequate contemporaneous evidence, and have ensured those policies have been implemented correctly are likely to find the PDCF process, or a regular enquiry, a less intensive and expensive proposition than those that are not as well prepared. Audit readiness should therefore be high on the agenda for all businesses: preventative action is typically much more efficient than seeking to retrospectively defend a position, particularly given the potential difficulties that arise with seeking to collect historical evidence.
It should not be taken for granted that the historical high levels of registration will continue. Taxpayers speak to their peers and would be expected to be mindful of the ongoing experiences of others. In our view it is important that the PDCF remains a facility where the focus is on the big picture, and where a proportionate approach can be taken to address questions on the intra-group arrangements. Should too much HMRC attention be given to minor points, or with very prescriptive requirements of the PDCF report, there is a significant risk that the registrants’ collective experience worsens, which could lead to fewer groups registering. One useful thing that HMRC can therefore do is ensure that their most experienced specialists are in the PDCF case teams and that their governance processes are quick so that registrants feel that HMRC are being reasonable and fair.
The PDCF requires taxpayers to be engaged with the HMRC compliance efforts and trust in the experience that they will receive where registering. In our view, HMRC would benefit from a perception that registration for the PDCF is more than just the lesser of two evils such that registration is seen as an opportunity to disclose adjustments in a proportionate way that will not prompt unnecessary wider questions. The apparent low level of spontaneous PDCF registrations suggest that there could be work for HMRC to do in this regard.
Another relevant recent development is that the updated HMRC APA Statement of Practice indicates that admission to their APA programme will not be granted for PDCF nudged businesses until the perceived risks are resolved to HMRC’s satisfaction. MNE’s wanting to proactively deal with any uncertainty about their historical provisions before they are challenged by HMRC may choose APA rollback instead of spontaneous PDCF registration (depending on whether APA rollback is also available in the other jurisdictions). A key advantage of APA rollback is that it is a bilateral or multilateral process involving all relevant parties, though it may be expected that PDCF would be an expedited process.