Tax investigations yield hits £13bn

HMRC saw actual cash collected from all tax investigations hit £13bn in 2018/19, up 27% from £10.3bn in 2017/18, while transfer pricing fines for multinationals have hit a record £413,000 

The tax investigations' yield was partly driven by payments HMRC has received ahead of the loan charge being introduced in April 2019, and the results of HMRC’s offshore tax campaign last year, while new technology has meant HMRC has also become more successful at identifying cases for investigation that are likely to result in large amounts of extra tax being collected, according to research by UHY Hacker Young.

However, despite the increase in cash collected last year, actual cash only makes up 38.5% of the £34bn HMRC claims to have collected from investigations, with the bulk made up of  hypothetical estimates, such as ‘revenue losses prevented’ and ‘future revenue benefit’.

Clive Gawthorpe, partner at UHY Hacker Young, said: ‘Although HMRC will be pleased that cash collected from investigations has jumped, the majority of that yield is questionable.

‘Overall, almost two thirds of HMRC’s yield from investigations isn’t actual cash, it’s purely hypothetical and could just be a figure plucked out of thin air.’

HMRC fines for transfer pricing errors up tenfold

Meantime, HMRC action to clamp down on aggressive use of transfer pricing and related errors has seen a tenfold increase in HMRC fines imposed on multinational businesses in relation to transfer pricing irregularities, according to figures obtained by LCN Legal, which says new country-by-country reporting (CBCR) rules are having an impact on compliance.

HMRC imposed £413,437 in fines in 2018/19, compared to just £45,600 in 2015/16.

LCN Legal says that while the amount in fines is still modest, the dramatic ramping up in the value of penalties over the last two years is evidence of a tougher approach by HMRC towards transfer pricing non-compliance.

The international legal consultancy says HMRC typically tries to reach a negotiated settlement in transfer pricing disputes with multinational enterprises and avoid imposing penalties.

 In the years from 2012/13 to 2017/18, HMRC secured £6.5 bn of additional tax by challenging the transfer pricing arrangements of multinationals. The tax haul increased from £504m in 2012/13 to £1.6bn in 2017/18. Fines are imposed in a small, albeit growing, minority of cases.

Paul Sutton, partner at LCN Legal, said: ‘Transfer pricing remains an area of growing focus not just for HMRC but for tax authorities around the world. HMRC has scaled up its capabilities in this area and is devoting more resources to scrutinising the transfer pricing arrangements of multinational businesses.’

LCN Legal says that the implementation of country by country reporting (CBCR), which requires multinationals to share data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which they operate has increased the level of transparency of their transfer pricing arrangements, thereby making it easier for HMRC to challenge them.

Sutton said: ‘The filing deadline for the first country by country report was December 2017, which corresponds to the sharp jump in fines imposed by HMRC in relation to transfer pricing arrangements. It is likely that some multinationals had not adequately managed the risks associated with the introduction of CBCR and had failed to plan for the greater transparency their transfer pricing arrangements would be subjected to.’

LCN Legal points out that the launch of the profit diversion compliance facility this January, which is designed to allow multinationals using arrangements targeted by the diverted profits tax to bring their tax affairs up to date, is further evidence of HMRC’s greater focus on transfer pricing compliance.

Sutton said: “The profit diversion compliance facility is a form of what HMRC calls “co-operative compliance”. It wants to work with multinationals to put their tax affairs in order and is generally reluctant to impose fines. The increase in fines does suggest, however, that HMRC is increasingly prepared to use the stick in as well as the carrot.’

LCN Legal says that multinationals can reduce the risks associated with the greater focus their transfer pricing arrangements are under by putting in place inter-company agreements, which will support transfer pricing policies in the event of a challenge or audit by a given tax administration, and meet the group's non-transfer pricing needs.

Pat Sweet

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