Increase in UK tax suspected of being underpaid by large businesses

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law, said that the figures showed a "dramatic increase" in the amount of big business tax that HMRC fears is being underpaid.

Collins said that the sharp rise in suspected underpaid tax by corporates is being driven by increased scrutiny of transfer pricing, which is how large corporates allocate their costs and income between different countries. Transfer pricing anti-avoidance rules are designed to prevent intra group supplies of goods and services being priced in a way that deliberately and artificially reduces a company's taxable profits in the UK.

The HMRC figures show that the amount of tax which is estimated to be underpaid through transfer pricing arrangements and thin capitalisation has jumped to £10.4bn up from £6bn a year ago. Thin capitalisation refers to the use of interest payments from one part of a group of companies to another to reduce profits in the UK.

The figures relate to 'tax under consideration’, an estimate of the maximum potential additional tax liability across all enquiries, before full investigations have been completed. They relate to work undertaken by the HMRC’s Large Business Directorate, which covers the UK’s 2,000 largest businesses. Typically, after investigation of individual cases, the amount actually due tends to be around half the initial estimate.

In January 2019 HMRC launched a new Profit Diversion Compliance Facility (PDCF) to encourage multinational enterprises to reconsider whether their transfer pricing methodology remains correct and, if not, to submit a report under the PDCF with proposals to settle any outstanding tax, avoiding an HMRC investigation.

HMRC began issuing letters in 2019 to businesses that it suspected may have been diverting profits from the UK. After a break as a result of the coronavirus pandemic it has recently issued a further batch of letters. The letters require businesses to respond within 90 days or face investigation.

"Anyone who considers they may have a liability should seriously consider using the compliance facility. A disclosure under the facility will be treated as 'unprompted', which should take any penalty down to zero in most cases," Collins said.

In the last year, according to the figures, the Large Business Directorate collected an extra £13.2 billion in tax from investigations and other compliance work. That equates to around 44% of the amount tax that HMRC suspected might have been underpaid by corporates at the start of that year.

“HMRC’s Large Business Directorate have a particularly good record, collecting between 40% and half of all the underpaid tax they identify. Sometimes they do that through negotiation but other times it is full scale investigations and litigation all the way through the courts,” Collins said.

For companies with a UK parent the figure for suspected underpaid tax is £24.6bn up from £20bn last year and for non UK companies £9.9bn up slightly from £9.7bn. Collins said this suggests that HMRC may be picking up more major new issues with UK companies than with US tech companies.