HMRC focuses transfer pricing crackdown on higher-value cases

New figures obtained by Pinsent Masons, the law firm behind Out-Law.com, show that HMRC launched 250 investigations into transfer pricing by UK companies in the 12 months to 31 March 2017.

That was a 31% drop from 362 investigations launched in 2015/16. However the amount of tax under dispute rose 51% from £3.8 billion to a record £5.8bn.

Pinsent Masons tax expert Jason Collins 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.”

Transfer pricing refers to the necessary charges made between different parts of a multinational business for goods, services or intangible assets, including intellectual property. Tax rules provide that transactions between connected parties should be taxed as if they were on arm's length terms. 

In recent years, multinationals have been accused of arranging their transfer pricing to minimise their tax liabilities in jurisdictions such as the UK.

Last year figures showed that the time taken to settle transfer pricing cases has increased, with disputes taking two and a half years to settle on average.

Pinsent Masons said HMRC was increasingly using diverted profits tax (DPT) investigations to challenge transactions which take place within a group. HMRC’s DPT investigations yielded £281 million in 2016/17, more than nine times more than in 2015/16 when these investigations yielded just £31m.   

DPT was introduced in 2015 and is designed to deter activities that divert profits away from the UK so that they are not subject to corporation tax. A DPT investigation can be settled by adjusting transfer pricing so more UK corporation tax is paid. DPT is paid at 25%, whereas corporation tax is only payable at 19%.

An HMRC official said in November that DPT was a “game-changer” which had caused companies to look at their transfer pricing structures more closely.

Collins said the increased attention on DPT could have influenced the number of HMRC transfer pricing investigations.

“Several major corporates have already been subjected to DPT inquiries,” Collins said.

“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,” Collins said.