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HMRC sees highest returns from large business investigations

Investigations by HM Revenue and Customs (HMRC) into tax compliance by large businesses returned £77 for every £1 spent last year, making it the most lucrative of the department's specialist investigations teams for the second year running.08 May 2018

Figures obtained by Pinsent Masons, the law firm behind Out-Law.com, show why HMRC is likely to continue to invest in the team and target large and complex businesses through its large business directorate (LBD), according to tax expert Steven Porter.

Additional tax yielded from LBD investigations increased by 17% last year, from £66 per £1 spent in 2015/16, according to the figures. The amount of additional tax collected by the counter avoidance directorate also increased over the same period, from £40 per £1 invested to £46 per £1 invested; while the amount collected by the Fraud Investigation Service (FIS) fell, from £30 per £1 invested to £13 into every £1 invested.

Porter said that the LBD figures were likely driven by diverted profits tax (DPT), which had been a "game changer" for the department given its "pay now, argue later" taxation model. By contrast, reduced returns on costs at the FIS may reflect how the directorate has dealt with most of its straightforward cases and is now focusing on the more complex ones, which take up more staff time.

"It is perhaps surprising that the large business and counter avoidance directorates saw increased returns yet again, given that yields were already inflated by the successful issuance of APNs [advanced payment notices] the year before," he said. "HMRC seems to have had another bumper year, this time likely driven by DPT."

"The FIS clearly doesn't have access to the same tool box and the comparatively easy cash that APNs and DPT represent to other directorates," he said.

DPT 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. 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.

The UK Treasury has already pledged an extra £1.8 billion to HMRC to fund its compliance work in the lead up to 2020. In return, HMRC has committed to collecting an additional £920 million by 2020/21. The amount of 'tax under consideration' for suspected underpayment by the LBD rose 13% last year, to £24.8bn, according to figures obtained previously by Pinsent Masons. The amount actually due once investigation of individual cases is complete tends to be around half of that amount.

"What HMRC labels as tax avoidance is beginning to run out," said Steven Porter of Pinsent Masons. "As a result, in order to generate similar yields as it has previously, HMRC is now going after what used to be considered uncontroversial tax positions."

"HMRC is increasingly looking beyond 'easy wins' and traditional focuses of investigations," he said.