The figures show that HMRC was investigating £27.8bn of tax possibly underpaid by large corporates in 2018, up 14% from the £24.8bn believed to be underpaid the year before. US-based multinational businesses represented 17% of the total amount of tax that HMRC was targeting last year. Swiss-based businesses represented the second highest at 6% of underpaid tax, followed by Ireland (3%) and France (2%).
The figures refer to 'tax under consideration' by HMRC’s Large Business Directorate (LBD), which is an estimate of the maximum potential additional tax liability across all inquiries, before full investigations are completed. Typically, after investigation of individual cases, the amount actually due tends to be around half the original estimate. The LBD covers the 2,100 largest and most complex businesses in the UK.
Jason Collins, a tax disputes expert at Pinsent Masons, said that multinational businesses are being targeted by HMRC’s investigations into diverting profits overseas, with multinational technology groups a particular focus. This is because digital business models enable the company to generate revenues in places where it has little physical presence and therefore, under current international tax rules established in a pre-digital era, a limited tax liability.
This growing scrutiny of the diversion of profits by HMRC comes after recommendations made by the Organisation for Economic Cooperation and Development (OECD) in 2015 as part of its programme for reducing international tax avoidance by corporates – its base erosion and profit shifting (BEPS) project.
The UK's Diverted Profits Tax was introduced in 2015 to deter activities that divert profits away from the UK so that they are not subject to corporation tax. DPT is paid at 25%, compared to corporation tax at 19%. This higher rate is intended to be an incentive to groups to adjust their transfer pricing, as paying more corporation tax can eliminate a DPT liability.
DPT raised £388 million in 2017-18 – more than the £360 million forecasted when the tax was introduced.
However, Jason Collins said that HMRC will be focusing on the tax affairs of all the businesses covered by its LBD in the coming year.
“It is not just multinational businesses on HMRC’s radar – the affairs of all large businesses are under growing scrutiny. The amount of tax HMRC thinks was underpaid last year was a record high and it will be looking to act on this,” he said.
In January HMRC launched a new 'profit diversion' compliance facility that gives businesses the opportunity to restructure cross-border arrangements that divert profits overseas and pay back any tax that they owe. If a business makes a disclosure then they will face lower penalties than they otherwise would have and will not be subject to investigation.
HMRC has begun issuing 'nudge letters' to those on its 'hit list' of businesses it suspects are diverting profits.
"HMRC expects all businesses operating cross-border to have revisited their transfer pricing policies to check they accord with what is actually happening in practice," Jason Collins said.
"HMRC is already putting a huge amount of resource into counteracting profit diversion. No business operating cross-border to a significant extent can afford to be complacent," he said.
As part of its efforts to increase the tax paid by technology groups, the UK government has proposed a new digital services tax (DST) which will come into force in April 2020. DST is a 2% tax on the revenues of businesses that are considered to derive significant value from the participation of their users. It will catch search engines, social media platforms and online marketplaces.
"The implementation of DST is fraught with difficulties, like how a business works out what proportion of its revenues are linked to the participation of UK users when those users are not paying to use the platform and some will be much more active than others," Jason Collins said.
The OECD intends to reach a solution by the end of 2020. France, Italy, Spain and Austria are all proceeding with their own measures for a 3% tax on the revenues of certain digital companies.