Additional tax take from businesses falls as HMRC focuses on 'mid-tier businesses', says expert

Heather Self of Pinsent Masons, the law firm behind Out-Law.com, was commenting on the latest 'tax under consideration' figures published by HMRC, indicating the maximum it could expect to receive if all of its current investigations into the tax affairs of large businesses were successful. This amount rose from £15.7 billion last year to £19bn this year; an increase that Self described as "relatively modest" given the expanded remit of HMRC's Large Business Directorate over the same period.

"Despite the new Large Business Directorate having expanded from covering 770 companies to 2,000, the rise of tax under consideration is relatively modest," she said. "However, it does show that HMRC is now focusing its attention on the tax affairs of mid-tier businesses."

"HMRC has be no means taken its eyes off large businesses entirely, however, as it recently published plans to force all large companies to publish the details of their tax strategy and follow a 'voluntary code of conduct', with a board member taking personal responsibility," she said.

A consultation published last month by HMRC proposes requiring large businesses to publish their tax strategy, and to nominate a main board director who could be held legally responsible for doing so. It has also proposed introducing a voluntary code of practice on taxation for large businesses, and a new regime for imposing 'special measures' on large businesses with a track record for persistent aggressive tax avoidance or failing to cooperate with HMRC.

The tax under consideration figures cover all types of tax potentially payable by businesses, from corporation tax to value added tax. Some of the largest single sources of potential inaccuracy according to the figures included transfer pricing, with £2.4bn worth of tax under consideration; and potential avoidance, with £1.9bn worth of tax under consideration.

"Businesses of any size that have cross-border intra-group transactions should now be aware that HMRC is likely to have them firmly in its sights," said Self.

"The substantial jump in tax under consideration for transfer pricing bears out what has been seen in the market in recent times – that HMRC has been focusing much more on intra-group payments within businesses that are not multibillion pound household names. Given how thoroughly their transfer pricing arrangements have been scrutinised, HMRC may now see the biggest multinationals as being relatively low-risk, while mid-tier businesses now represent a happier hunting ground," she said.

The transfer pricing regime exists to ensure that transactions made between connected parties, such as different entities within the same corporate group, are taxed in the same way that they would have been had the connection not existed. The rules permit HMRC to adjust the amount of income earned for tax purposes or expense incurred on transactions between companies where it appears that the transaction did not take place at 'arm's length', with the same terms as those that would apply if the transaction involved an unrelated company.

Much of the work currently being undertaken by the Organisation for Economic Co-operation and Development (OECD) on base erosion and profit shifting (BEPS) by multinational companies involves examining current transfer pricing arrangements. In recent years, several multinational companies have been accused of deliberately transferring profits from higher to lower tax jurisdictions in order to reduce their tax liability.