There has been a 51% increase in the amount of tax that HMRC believes may potentially have been underpaid by large companies through transfer pricing, with the total amount challenged now standing at £5.8bn, up from £3.8bn in 2015/16, according to research by Pinsent Masons
The £5.8bn in disputed tax relates to work undertaken by HMRC’s large business directorate, which scrutinises the tax affairs of the UK’s 2,000 largest and most complex businesses. Tax under consideration is an estimate of the maximum potential additional tax liability across all enquiries, before full investigations have been completed. Typically, after investigation of individual cases, the amount actually due tends to be around half the initial estimate.
The law firm says its analysis of the figures provided from a freedom of information (FOI) request, suggests the substantial rise in tax under consideration may reflect an increase in diverted profits tax (DPT) inquiries which are being used by HMRC to revisit transfer pricing positions.
Data from the FOI request indicates that transfer pricing now represents nearly a quarter (23%) of the total suspected amount of tax (£25bn) potentially underpaid by large businesses last year – up from 17% last year (£21.8bn).
Ian Hyde, partner at Pinsent Masons, said: ‘HMRC has been investing in transfer pricing specialists and this is clearly reflected in the figures. This team was expanded in the run up to the introduction of DPT.
‘DPT is being applied much more widely than was anticipated when the rules were first introduced.’
Hyde pointed out that the time limit for HMRC to issue DPT notices is normally two years from the end of the accounting period, suggesting there could be a flurry of DPT notices being issued over the next few months, as many companies have 31 December year ends.
Pinsent Masons says that businesses often enter into Advanced Pricing Agreements (APAs) with HMRC, which determine the appropriate transfer pricing method to be used for a set period of time.
‘In some cases, HMRC is using DPT to get a second bite of the cherry in respect of existing structures. Businesses may have thought they had cleared the tax position by obtaining an APA on the transfer pricing issues but now that DPT is available that may not be the case,’ Hyde warned.
Figures released last month show that transfer pricing enquiries are taking longer to settle, with enquiries settling in 2016-17 taking an average of 28.8 months to settle, an increase of over a month from the previous year (27.6 months).
Report by Pat Sweet
