HMRC keeps “intense focus” on transfer pricing, says expert

Although there was a slight fall of 10% in the number of reviews in 2015/16 compared to the previous year, when HMRC undertook 415 transfer pricing reviews, the amount of tax under consideration rose by 60%.

Tax expert Heather Self of Pinsent Masons said transfer pricing remained an area “of intense focus” for HMRC.

“They have been investing in specialists on the issue and businesses need to ensure that compliance procedures surrounding the process are robust,” she said.

“The value of tax HMRC believes it could be owed has risen substantially, and we are likely to see increased activity in this space going forward,” Self said.

‘Transfer pricing’ relates to the pricing of a transaction when two companies which are part of the same multinational group trade with each other. It is particularly relevant where companies are located in different tax jurisdictions.

Setting an appropriate transfer price is a difficult exercise in complex transactions, so disputes are common. Tax authorities target transfer pricing which they believe has incorrectly reduced tax in their jurisdiction. 

The £3.8bn figure is an estimate of the maximum potential additional tax liability across all enquiries undertaken by HRMC's Large Business Directorate. The amount due tends to drop after individual investigations.

Figures obtained by Pinsent Masons in February showed that HMRC collected £2.6bn of additional corporation tax following its investigations into big businesses last year.

Last year Self said the rise in the amount of tax under consideration suggested HMRC was becoming bolder at looking into companies' international taxation issues.

According to Pinsent Masons, the fall in the number of reviews last year could mean that HMRC's transfer pricing specialists were focused on other matters with transfer pricing elements, such as the Diverted Profits Tax regime.

This was introduced in April 2015 and is a tax on profits 'diverted' from the UK to another jurisdiction, for example where foreign companies take tax out of a UK subsidiary through a tax deductible payment to an associated entity in a low-tax jurisdiction, or where a non-UK company seeks to create tax advantages by using transactions or entities that lack economic substance.