Disputed tax from big business hits £27.8bn

Figures released today show that the amount of underpaid tax in dispute with the UK’s 2,000 largest businesses increased to £27.8bn in 2017/18, a 12% increase on the previous year, as HMRC steps up its investigative activity

The study, conducted by Pinsent Masons, suggests that heightened scrutiny of big businesses by HMRC and an increase in the number of open inquiries is responsible for the increase. This has contributed to delays in the resolution of outstanding cases. The average time taken to complete a case is now 30.4 months, slightly longer than two and a half years. This is an 11% increase from the 27.3 months found in 2016/17.

22% of the total due is attributed to suspected tax underpaid through transfer pricing. This refers to the charges made between different parts of a multinational for the transfer of goods, services, and intangible assets. HMRC is reported to believe that the amount of tax underpaid due to transfer pricing to be £6.1bn, up 6% from £5.8bn in 2016/17 and from £983m five years ago.

There has also been an increase in inquiries into diverted profits tax (DPT). Introduced in 2015, DPT is intended to deter business activities that move profits away from the UK. In a bid to disincentivise these actions, DPT is paid at 25%, compared to corporation tax at 19%.

Companies can seek out an advance pricing agreement (APA) with HMRC which lays the groundwork for resolving transfer pricing issues in advance of a return. However, such agreements do not consider DPT and can take a long time to conclude.

Jason Collins, partner at Pinsent Masons, says: ‘The UK’s biggest businesses should be prepared for a new wave of HMRC investigations as suspected underpaid tax heads towards £30bn.’

‘Transfer pricing represents nearly a quarter of the suspected amount underpaid which reflects the hugely complex, multinational structure of the UK’s top businesses. It can be difficult for companies operating across multiple tax jurisdictions to set prices that satisfy all authorities.

‘The introduction of DPT is giving HMRC a second bite of the cherry on transfer pricing disputes – in some cases it is being used to persuade businesses to accept transfer pricing adjustments where they thought they were protected by an advance pricing agreement. Faced with DPT at 25%, many would rather settle for 19% corporation tax.

‘Not only are transfer pricing disputes taking longer than ever to resolve but so are applications for Advance Pricing Agreements which can protect businesses from HMRC inquiries. These delays are causing unwelcome uncertainty for businesses.’

Report by James Bunney

 

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