The introduction of diverted profits tax (DPT) has been a "game changer" for HMRC, which is also taking a much tougher line on more routine tax planning, according to tax investigations expert Steven Porter of Pinsent Masons, the law firm behind Out-Law.com.
"The idea that foreign companies are getting out of their UK tax obligations has been a highly contentious topic over the last five years," he said. "However, the figures suggest that HMRC now sees British businesses as a far richer seam for investigations."
"As UK corporates have moved away from buying schemes, HMRC is taking a more aggressive stance in relation to more routine matters to ensure it gets paid what it believes it is owed," he said.
Total 'tax under consideration' related to large foreign companies was £8.4 billion in 2017; an increase of 9% over five years from £7.7bn in 2012, according to figures obtained by Pinsent Masons. Tax under consideration related to large UK companies increased by 36% over the same period, from £12.1bn in 2012 to £16.4bn in 2017.
The figures mean that UK businesses now account for 66% of all suspected underpaid tax, up from 61% in 2012, Porter said. Tax under consideration is an estimate of the maximum potential additional tax HMRC could recover from all open enquiries before full investigations have been completed. HMRC typically recovers around half this amount once investigation of individual cases is complete.
"The introduction of DPT has been a game changer for HMRC, and it may be that a large part of the increase in tax under consideration in 2016 and 2017 relates to DPT. Although DPT was badged as a tax that would affect multinationals, it is being much more widely deployed by HMRC. It may be UK groups, rather than foreign-owned multinationals, which are suffering most of the DPT challenges and this could be feeding into the figures," he said.
DPT was introduced in April 2015 and is a tax on profits 'diverted' from the UK to another jurisdiction; for example by way of a tax deductible payment to an associated entity in a low-tax jurisdiction, or through the use of transactions or entities that lack economic substance. Once HMRC issues a DPT charging notice, the tax demanded has to be paid in full and usually cannot be appealed for another 12 months while HMRC reviews the notice.
In March, the European Commission proposed updating corporate tax rules to reflect the growth of digital business models, so that profits are taxed where businesses have significant interaction with users through digital channels. It has also recommended the introduction of a 3% interim tax, to be applied to revenues created from activities where users play a major role in value creation, until comprehensive changes can be made.
The UK is looking at its own proposals to tax 'user generated' value in the absence of international agreement. It released a paper ahead of the European Commission's announcement making it clear that, although it supports reform of the international corporate tax framework to tax digital businesses, it would be willing to act unilaterally on an interim basis.
Either proposal, if adopted, could well increase the amount of disputed tax attributable to foreign companies, Porter said.