HMRC issue new Profit Diversion Compliance Facility nudge letters

HMRC continue their transfer pricing compliance push with another tranche of PDCF nudge letters to selected Multinational Businesses

HMRC continue their TP compliance push

At the end of January 2024, HMRC issued another batch of targeted Profit Diversion Compliance Facility (PDCF) nudge letters to businesses whose tax affairs are handled by the Wealthy and Mid-Sized Business Compliance Directorate. Tax teams at potentially affected businesses should therefore be on the lookout for these arriving, particularly those submitting Country-by-Country Reports and those that may be perceived to have the indicators of Profit Diversion risk set out in HMRC’s PDCF guidance. The particular indicator we have seen most often is around important regional functions based in the UK receiving a cost plus or transactional net margin method (TNMM) reward.

This action follows HMRC’s publication of Transfer Pricing (TP) statistics for 2022/23 just under a week prior, which included statistics on the PDCF including detailing the additional revenue generated of £732 million. HMRC restricted themselves to only a couple of ad hoc PDCF nudge letters in 2022/23 but this is the second batch of nudge letters in 2023/24 and represents a renewed push after a focus of HMRC resources on resolving existing cases last year. We have also noticed an uptick in TP enquiries recently.

The PDCF nudge letters to date include generic wording stating that they consider the recipients’ transfer pricing may not be fully compliant with the arm’s length principle, and giving the recipient 90 days to decide whether or not to register for the PDCF. The practical alternative to registering for the PDCF for the recipients is an HMRC-led enquiry. Given the emphasis that is placed on evidence collection, the PDCF process can be likened to a tax investigation that is run by the business itself with associated pros and cons.

As there are circumstances in which it may be preferable for a company to register for the PDCF, and others in which a regular enquiry may be preferable, immediate consideration of the options is warranted. For all businesses, maintaining audit readiness is critical.

The Evolution of the PDCF was discussed in our previous article. If you would like to discuss transfer pricing audit readiness including the PDCF, please contact Nick Stevart from our transfer pricing controversy team, or your usual KPMG in the UK transfer pricing contact.