Increase in HMRC criminal investigations 'marks evolution in tax compliance'

The Financial Times reported that HMRC currently has multiple criminal investigations involving transfer pricing disputes ongoing, after opening its first case in 2018.

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.

However, HMRC believes that some multinational companies are making mistakes, taking too aggressive a position or in rarer cases simply misrepresenting internal transactions.

Figures published in November last year showed that the amount of tax estimated by HMRC to be underpaid through transfer pricing arrangements and thin capitalisation had jumped to £10.4 billion, up from £6bn in 2019. 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.

Tax expert Andrew Sackey of Pinsent Masons, the law firm behind Out-Law, said the news showed HMRC’s strategic approach to the tax compliance of the UK’s largest companies was evolving.

Sackey, who formerly headed the Corporate Criminal investigations in HMRC's Fraud Investigation Service (FIS), said during 2018 the FIS joined forces with the large business directorate to put in place the ‘Profit Diversion Compliance Facility’.

The facility enables multinational enterprises with cross-border pricing arrangements which may be inconsistent with the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines to cooperate with HMRC to ensure transparency in better aligning corporation tax payments with economic activity.

“This evolving and expanding series of criminal interventions is clearly the next step in HMRC’s determination to regularise non-compliant transfer pricing conduct, or representations made within the context of such negotiations,” Sackey said.

“This more aggressive stance makes it even more important that firms examine their profit reporting treatments and consider taking advantage of the civil facility if that is appropriate. Above all it’s critical that there is complete consistency in respect of any documents or representations made to HMRC over what can be a protracted period of time,” Sackey said.

According to the Financial Times, an HMRC spokesperson said the authority most investigations into transfer pricing were resolved by the business agreeing to change its arrangements and pay additional corporation tax. However, the authority would consider opening a criminal investigation where there was evidence of dishonesty.

Tax expert Jason Collins of Pinsent Masons said: “Most of the cases seem to rest on a representative of the company misrepresenting the position when asked about the company's affairs. HMRC tend to shy away from prosecuting companies as they need to be able to fix any dishonesty to the most senior people in the company. Where they cannot show such a conspiracy, these recent developments suggest HMRC will focus their efforts on pursuing the 'lone wolf' dishonest individual instead.

“This goes to show that tax heads at large companies need to be careful when representing facts to HMRC – to make sure they are accurate. If they are not, HMRC will want to know whether that was an honest mistake or something more sinister. Even if HMRC cannot show it was a deliberate misstatement, the tax head will open the company up to large penalties if the statement was made honestly but carelessly,” Collins said.

HMRC figures show that in the 2019/20 financial year the FIS delivered 573 criminal charges and closed over 21,000 civil investigations across all areas of investigation (including 856 of its most serious Code 8 and 9 civil investigations).