UK tax authority ‘particularly vigilant’ on transfer pricing, figures show

New figures emphasise that UK tax authority HM Revenue and Customs (HMRC) is now particularly vigilant in testing the transfer pricing models adopted by multinational businesses, an expert has said.

HMRC collected an extra £1.6 billion in tax through investigations into multinational businesses allocating profits to overseas ventures in the year ending 31 March 2023. This is an increase from £1.5 billion in the previous year.

Steven Porter, tax law expert at Pinsent Masons, said: “Multinationals shifting profits overseas have long been seen by HMRC as an area where billions of pounds in underpaid tax could be recovered. These latest figures show it is succeeding.”

Transfer pricing refers to a method that allows companies to price transactions between entities in the same group or enterprise. Multinational businesses can allocate costs and income between parts of the business located in different countries, allowing for a reduction in tax payable in the UK.

HMRC believes that the UK misses out on significant sums through businesses transferring profit to lower-tax jurisdictions. This has led to transfer pricing becoming a major focus of investigations carried out by the UK tax authority in recent years.

“The recent figures also suggest HMRC is now focused on clearing a backlog of older transfer pricing cases,” said Porter.

A total of 153 transfer pricing cases were settled during the year running to 31 March 2023. A total of 397 HMRC employees are currently focused on international tax issues involving multinational businesses, including transfer pricing, representing a significant number of personnel in the HMRC tax department.

The figures show that the number of ‘advance pricing agreements’, under which HMRC agrees a multinational business’s approach to transfer pricing before it files its tax return, reached a record law in 2022/23. Just 15 agreements were signed, despite 45 applications being received.

“The fall in the number of agreements suggests these agreements are becoming harder to reach with HMRC. We know HMRC is very tough on transfer pricing but making advance agreements harder to reach could pose problems. It is much better for both HMRC and businesses to make these agreements and avoid the cost and delays involved in investigations and disputes,” said Porter.