HMRC Transfer Pricing Compliance: A Step-by-Step Guide to the Updated Profit Diversion Compliance Facility

Introduction

HMRC's Transfer Pricing and Profit Diversion Compliance Facility (PDCF) has been updated as of June 2026 to expand its scope, now covering a broader range of transfer pricing risks and incorporating new rules on Undertaxed Profits (UTPP). For multinational corporations (MNCs) operating in the UK, understanding and complying with the PDCF is essential to managing tax risk and avoiding penalties. This guide walks you through the facility's purpose, eligibility, application process, and documentation requirements, with practical tips for preparing robust transfer pricing documentation and handling HMRC enquiries.

By the end of this guide, you will have a clear roadmap for using the PDCF to disclose outstanding liabilities, align with HMRC's expectations, and strengthen your overall UK tax compliance posture.

Prerequisites

Before engaging with the PDCF, ensure your organization has the following in place:

• Transfer Pricing Documentation: Master file, local file, and country-by-country (CbC) report prepared in line with OECD guidelines and UK requirements.
• Functional Analysis: Detailed analysis of functions performed, assets used, and risks assumed by each entity in the group.
• Intangible Property Register: Identification and valuation of all intangible assets (patents, trademarks, know-how) held by UK entities.
• Governance Framework: Clear policies for transfer pricing risk management and documentation review cycles.

If any of these are missing or outdated, address them before initiating the PDCF process.

Step 1: Understand the PDCF and Its Updated Scope

The PDCF is a voluntary disclosure facility that allows MNCs to correct outstanding transfer pricing liabilities and profit diversion risks. The June 2026 update expanded the facility to cover:

• A broader range of transfer pricing risks, including those related to financing arrangements, management fees, and service transactions.
• New Undertaxed Profits (UTPP) rules, which target arrangements where profits are shifted to low-tax jurisdictions.
• Intangible property transfers and valuations, reflecting HMRC's increased focus on hard-to-value intangibles (HTVI).

The facility is linked to the UK's Diverted Profit Tax (DPT) regime, meaning disclosures made under the PDCF can reduce exposure to DPT and associated penalties. HMRC has published specific indicators of profit diversion risk, including: high profit margins relative to comparables, significant related-party transactions, use of hybrid entities, and transfers of intangible assets to low-tax jurisdictions.

Step 2: Assess Eligibility and Scope of Disclosure

The PDCF is open to any MNC that has unpaid transfer pricing liabilities or has engaged in profit diversion arrangements. Eligibility requires that:

• The disclosure is voluntary and made before HMRC opens an enquiry.
• The taxpayer has not been contacted by HMRC regarding the specific issue.
• The taxpayer agrees to cooperate fully and provide all requested information.

Determine the scope of your disclosure by reviewing all UK-related transactions and identifying any that may be non-arm's length or involve profit diversion. Pay special attention to:

• Intangible property transfers (including cost contribution arrangements).
• Financing transactions (loans, guarantees, cash pooling).
• Service charges (management, marketing, R&D).
• Transactions with entities in low-tax jurisdictions.

If you are unsure whether a transaction falls within scope, err on the side of disclosure or seek professional advice.

Step 3: Prepare the Disclosure Report and Required Annexes

The PDCF application requires a comprehensive disclosure report accompanied by several annexes. HMRC's guidance specifies the following components:

• Registration Form: Basic information about the taxpayer, group structure, and the nature of the disclosure.
• Disclosure Report: Detailed explanation of the arrangements, the transfer pricing issues identified, and the corrective actions proposed. Include a functional analysis and economic analysis supporting the arm's length price.
• Evidence Log: A schedule of all documents provided, including contracts, invoices, transfer pricing policies, and correspondence.
• Profit/Loss Analysis: A calculation of the revised profits or losses for each affected entity, showing the adjustment from the original position.
• Intangible Property Valuation: If the disclosure involves intangibles, include a valuation report prepared in accordance with OECD guidelines and UK tax rules.

Ensure all documentation is clear, consistent, and cross-referenced. HMRC expects a high level of detail and accuracy.

Step 4: Submit the Application to HMRC

Submit the completed registration form and disclosure report to HMRC's dedicated PDCF team. HMRC will acknowledge receipt and may request additional information or clarification. The review process typically takes several months, depending on the complexity of the disclosure.

During the review, HMRC may:

• Request supplementary documents or analyses.
• Conduct interviews with key personnel.
• Challenge the valuation of intangibles or the selection of comparables.

Cooperate fully and respond promptly to all requests. Maintaining open communication can help expedite the process and reduce the risk of escalation.

Step 5: Negotiate and Finalize the Settlement

Once HMRC completes its review, it will issue a settlement proposal outlining the agreed adjustments, interest, and penalties (if any). The PDCF generally offers more favorable penalty terms than would apply if HMRC discovered the issue through an enquiry. For example, penalties may be reduced or waived if the disclosure is timely and complete.

Review the proposal carefully and negotiate any points of disagreement. Once finalized, execute a formal agreement with HMRC and pay any outstanding tax, interest, and penalties.

Step 6: Implement Corrective Actions and Strengthen Ongoing Compliance

After the settlement, implement changes to prevent recurrence. This may include:

• Updating transfer pricing policies and documentation.
• Adjusting intercompany agreements to reflect arm's length terms.
• Enhancing governance and review processes.
• Training staff on transfer pricing compliance.

HMRC may conduct follow-up reviews to ensure compliance. Establish a robust monitoring framework to detect and address potential issues early.

Practical Tips for Preparing Transfer Pricing Documentation

• Use the OECD Transfer Pricing Guidelines: Align your documentation with the latest OECD guidance, including the 2022 updates on financial transactions and hard-to-value intangibles.
• Maintain Consistency: Ensure your master file, local file, and CbC report are consistent and tell a coherent story about your group's value chain.
• Document Economic Analyses Thoroughly: Include a detailed benchmarking study, comparability analysis, and justification for the transfer pricing method chosen.
• Update Annually: Review and update documentation each year to reflect changes in business operations, market conditions, and regulatory requirements.
• Retain Supporting Evidence: Keep contracts, invoices, board minutes, and other evidence that supports your transfer pricing positions.

Handling Intangible Property Valuations

Intangible property is a high-risk area for HMRC scrutiny. When valuing intangibles for PDCF disclosures or ongoing compliance:

• Apply the DEMPE Framework: Identify which entities perform Development, Enhancement, Maintenance, Protection, and Exploitation functions, and allocate returns accordingly.
• Use Appropriate Valuation Methods: The OECD recommends the income approach (relief from royalty, multi-period excess earnings) for most intangibles, but consider market and cost approaches where applicable.
• Document Assumptions: Clearly state all assumptions used in the valuation, including discount rates, growth projections, and useful life.
• Consider HTVI Rules: For hard-to-value intangibles, HMRC may apply ex-post adjustments if actual outcomes differ significantly from projections.

Managing HMRC Enquiries

Even after a PDCF disclosure, HMRC may still open an enquiry into other aspects of your transfer pricing. To manage enquiries effectively:

• Designate a Point of Contact: Appoint a single person or team to handle all communications with HMRC.
• Prepare an Information Pack: Have all relevant documentation ready and organized before the enquiry begins.
• Respond Promptly: Meet all deadlines for information requests to avoid penalties and escalation.
• Seek Professional Advice: Engage tax advisers with experience in HMRC transfer pricing enquiries.

Comparing the PDCF with Similar Facilities in Other Jurisdictions

The PDCF is similar to voluntary disclosure programs in other major economies. Below is a comparison with the IRS Compliance Assurance Process (CAP) in the United States:

Feature	HMRC PDCF (UK)	IRS CAP (US)
Purpose	Disclose and correct past transfer pricing and profit diversion liabilities	Real-time review and resolution of tax issues before filing
Scope	Transfer pricing, DPT, UTPP, intangible property	All tax issues, with a focus on material items
Timing	After the fact (voluntary disclosure)	Prospective (before filing returns)
Application	Submit registration form and disclosure report	Apply for admission; limited to large taxpayers
Penalty Relief	Reduced or waived penalties for timely disclosure	No penalties for disclosed items if resolved before filing
Documentation	Detailed report with evidence log and profit/loss analysis	Real-time access to taxpayer's books and records

Other comparable programs include the Australian Taxation Office's Voluntary Disclosure program and the Canada Revenue Agency's Voluntary Disclosures Program (VDP). Each has its own eligibility criteria and procedural nuances.

Common Pitfalls to Avoid

• Incomplete Disclosure: Failing to disclose all relevant transactions can lead to penalties and loss of relief.
• Poor Documentation: HMRC expects high-quality, contemporaneous documentation. Retrospective documentation may be given less weight.
• Underestimating Intangible Valuations: HMRC has dedicated resources to challenge intangible valuations. Use robust methodologies and engage valuation specialists.
• Missing Deadlines: Respond promptly to HMRC requests to avoid escalation and maintain good faith.
• Ignoring UTPP Rules: The updated PDCF covers UTPP risks. Ensure your analysis addresses potential undertaxed profits.

FAQ

What is the difference between the PDCF and a regular HMRC transfer pricing enquiry?

The PDCF is a voluntary disclosure facility that allows taxpayers to correct past errors proactively, often with more favorable penalty terms. An enquiry is a formal investigation initiated by HMRC, which may result in higher penalties and less control for the taxpayer.

Can the PDCF be used for ongoing transactions?

No, the PDCF is designed for past liabilities. For ongoing transactions, consider applying for an Advance Pricing Agreement (APA) or engaging in HMRC's International Compliance Assurance Programme (ICAP).

How long does the PDCF process take?

The timeline varies depending on the complexity of the disclosure. Simple cases may be resolved in 3–6 months, while complex cases involving intangible valuations can take 12–18 months or longer.

What are the penalties for non-compliance?

If HMRC discovers a transfer pricing issue outside the PDCF, penalties can be up to 100% of the tax underpaid, plus interest. Using the PDCF can significantly reduce these penalties.

Does the PDCF cover all types of profit diversion?

The updated PDCF covers a broad range of profit diversion arrangements, including those involving intangible property, financing, and service transactions. However, it does not cover issues related to personal service companies (IR35) or umbrella companies, which are subject to separate rules.

Next Steps: Strengthen Your Compliance Posture

Complying with HMRC's transfer pricing requirements is an ongoing process. To stay ahead, consider implementing continuous compliance monitoring tools. For example, AIGovHub's CCM Module connects directly to your ERP systems (SAP, Dynamics 365, Oracle, NetSuite) to automate controls testing, evidence collection, and separation of duties analysis, ensuring your transfer pricing documentation remains audit-ready. Additionally, AIGovHub SENTINEL provides real-time geopolitical intelligence and sanctions screening, helping you assess risks in the jurisdictions where your group operates. By integrating these tools, you can reduce the risk of future profit diversion issues and respond swiftly to regulatory changes.

This content is for informational purposes only and does not constitute legal advice. Consult with a qualified tax professional for guidance specific to your situation.