HMRC "actively targets" foreign-owned companies for underpaid tax, expert says

Information disclosed by HMRC under a freedom of information (FOI) request showed that foreign-owned companies were responsible for 44% of the £25 billion revenue "under consideration" by the department's Large Business Service (LBS). Tax expert Jason Collins said that this proved that the department "actively targets" foreign-owned companies to see if they owe any extra tax.

"There is a popular myth that HMRC and the Treasury are so easily charmed by the presence of foreign companies in the UK that they are happy to accept any tax payment that they get," said Collins, referring to recent press stories concerning the level of corporation tax paid in the UK by companies like Amazon, Apple and Google. "That could hardly be further from the truth."

Instead, Collins said, the feeling among businesses was that HMRC's "tough approach" could be "off-putting to possible inward investors".

"The enquiries to which HMRC then subjects these companies can be incredibly tense, time-consuming and, at times, confrontational," he said. "We might be hearing towards a more competitive corporation tax rate but the UK will only fully benefit from that if we can prove to overseas companies that the compliance work of HMRC is not an unreasonable burden."

According to the figures, foreign-owned businesses were responsible for approximately £11 billion of the £25bn revenue "under consideration" by the LBS as of 31 March 2011 – that is, reflecting either tax potentially underpaid or the risk to the Exchequer from companies bringing court action against overpaid tax. The LBS is responsible for the taxes paid by the 770 largest businesses in the UK.

Collins said that "only a fraction" of the £11bn figure would turn out to be actually owed once the department had conducted its investigations "for the simple reason that aggressive tax avoidance amongst large companies just isn't as widespread as some would have us believe".

"HMRC itself recognises that the £11bn is just total tax 'under consideration' and its experience is that, when they look across all relevant issues under enquiry, only around half of the estimate of tax under consideration is in the event brought into charge," he added. "Once HMRC properly investigates suspected tax avoidance and sees the companies' books, its estimates of the numbers owed to it by both foreign-owned and UK businesses come down quite rapidly."

Earlier this month John Mann, an MP on the House of Commons' Treasury Select Committee, suggested that Google could be called to explain its use of complex tax arrangements resulting in the alleged artificial diversion of its profits to Bermuda. His comments came after the Telegraph reported that the global search company had paid just over £6 million tax on a UK turnover of £395m last year as a result of running its UK operations as an 'agent' of its Irish subsidiary.

The Government has recently announced a variety of measures aimed at cracking down on tax avoidance, including the proposed introduction of a 'general anti-abuse rule' intended to apply to the main direct taxes and national insurance. HMRC is also consulting on changes to the Disclosure of Tax Avoidance Schemes (DOTAS) rules that would make it easier for the department to find out about taxpayers using avoidance schemes to artificially reduce their tax liability.

Figures obtained by Pinsent Masons last month showed that the amount of value added tax (VAT) collected from big businesses as a result of avoidance investigations by the LBS more than tripled in tax year 2010-11, to £1.34bn. The number of new investigations opened against businesses increased by 42% in the same period, according to the figures.