'Substantial' increase in large business tax disputed by HMRC, expert says

The figure obtained by Pinsent Masons, the law firm behind Out-Law.com, refers to 'tax under consideration' by the Large Business Directorate, the specialist team within HMRC which scrutinises the tax affairs of the UK's 2,000 largest and most complex businesses. It is an estimate of the maximum potential additional tax liability across all open enquiries but before any investigations have been completed.

Tax expert Heather Self of Pinsent Masons said that the "substantial" increase in the figure over the last 12 months suggested that HMRC had opened a significant number of new enquiries over that period, making transfer pricing the single largest risk or source of potential tax inaccuracies for large businesses.

"It seems the Revenue is taking a fresh look at the UK's largest businesses, with a focus on intra-group, cross-border transactions," she said. "This is likely to be a reaction to the increasing focus of the OECD and EU on international taxation, and it suggests that HMRC is getting bolder at challenging the amount of profit which should be allocated to UK economic activities."

"HMRC has been investing in transfer pricing specialists, and this is quite clearly reflected in the figures," she said.

Transfer pricing rules are designed 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 that connection not existed. HMRC can 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 global Organisation for Economic Cooperation 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.

The early impact of the UK's new diverted profits tax (DPT), which was first introduced in April 2015, could be one of the factors driving the increased amount of tax under consideration by HMRC, according to tax expert Heather Self. The DPT was designed to ensure that the UK gets what it perceives to be an appropriate share of tax on the profits of multinationals operating in the UK, and is charged at a rate of 25%. It applies to arrangements that create tax advantages either by exploiting the permanent establishment rules, or through the use of entities that lack economic substance.

"Although it is too early to see DPT enquiries, we could be seeing a surge in transfer pricing challenges for earlier years with a view to extending them to DPT later on," said Self.