Transfer pricing tax underpayment tops £5bn

HMRC launched 250 investigations into transfer pricing by UK corporates in the last year, according to research by Pinsent Masons with levels of underpayment up by 51%, indicating more complex inquiries

The law firm says the number of transfer pricing investigations opened in 2016/17 represents a fall on the 362 investigations launched in 2015/16, but reports that HMRC claims large businesses may have underpaid a record £5.8bn, up from £3.8bn in 2015/16.

Pinsent Masons says HMRC has been cracking down on transfer pricing for several years and has picked most of the easiest to win cases in this area through its investigations. The firm claims HMRC is now focusing on fewer higher-value, more complex cases, pointing to figures released last year which show the time taken to settle transfer pricing disputes has increased with disputes now taking on average two and a half years to settle.

Jason Collins, partner at Pinsent Masons, said: ‘The fewer transfer pricing inquiries launched last year reflects the fact that HMRC is taking on more complex and bigger ticket disputes, rather than them taking a less aggressive approach.’

Pinsent Masons says that even though HMRC conducted fewer investigations last year, it is not being less active in this area. Instead, it is using diverted profits tax investigations to challenge intra group transactions rather than transfer pricing investigations.

Diverted profits tax was introduced in 2015 and is supposed to deter activities that divert profits away from the UK so that they are not subject to corporation tax.

HMRC’s yield from these inquiries was £281m in 2016/17, up from £31m in 2015/16. A diverted profits tax investigation can be settled by adjusting transfer pricing so more UK corporation tax is paid. But the charge is higher as it is paid at 25%, whereas the corporation tax rate is 19%.

Collins said: ‘HMRC is focusing more of its attention on diverted profits tax (DPT) inquiries and this may be influencing the number of transfer pricing investigations its opens. Several major corporates have already been subjected to DPT inquiries.

‘DPT has to be paid first and then potentially claimed back later. It can be used to persuade businesses to take a transfer pricing adjustment rather than paying DPT, or to otherwise restructure their affairs so that they are paying more UK corporation tax.’

Report by Pat Sweet

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