Is there a future for HMRC transfer pricing agreements?

14 September 2018

HMRC recently published its transfer pricing and diverted profits tax (DPT) statistics  for 2017/18. The accompanying narrative from HMRC highlights:

  • an additional £6.5bn of tax secured from challenging the transfer pricing arrangements of multinationals over the six financial years ending with 2017/18;
  • a DPT yield of £388m for 2017/18 ; and
  • that there are 365 full-time equivalent HMRC staff focussed on international tax risk, including transfer pricing and DPT.

No doubt HMRC has sound public relations reasons for highlighting these specific points. However, the statistics may also provide insight into changes in taxpayer behaviour in the area of transfer pricing. Such changes may be a response to the negotiating position adopted by HMRC or to legislative changes; in particular the introduction of the corporate interest restriction (CIR) rules from 1 April 2017.

Advance pricing agreements (APAs)

The APA is a statutory mechanism by which businesses can reach agreement with HMRC regarding the transfer pricing of related party transactions. When in place, and subject to agreed conditions, APAs provide certainty regarding the tax position resulting from such transfer pricing arrangements. 

HMRC’s statistics indicate that 16 APA applications were submitted in 2017/18. This is half the number submitted in 2016/17, and about a quarter of the number submitted in 2014/15 (albeit that 2014/15 was a bumper year for APA applications).   

The statistics also indicate that HMRC turned down six APA applications in 2017/18 , such that only 10 applications actually progressed. By comparison, only two of the 66 applications made in 2014/15 were rejected. 

In addition, the statistics show that it is generally taking longer to agree APAs. The process is not straightforward, so this could simply be a function of the increased level of applications made in 2014/15. However, on the face of it, it appears that significantly fewer taxpayers are seeking APAs, whilst HMRC is rejecting more applications at the outset and then taking longer to conclude those that it accepts.  

Advance thin capitalisation agreements (ATCAs)

An ATCA is a form of APA specific to the transfer pricing of funding arrangements. The ATCA statistics appear to tell a similar story to those for APAs. HMRC does not set out how many ATCA applications were made each year but, whilst 213 ATCAs were agreed in 2014/15, only 79 were agreed in 2017/18 - a decrease of almost 65 per cent.

Equally telling is that the number of ATCAs in force has fallen from 577 in 2014/15 to 366 in 2017/18, suggesting that taxpayers are either not seeking to extend ATCAs once they expire, or simply not seeking ATCAs at all. This may be explained by an increase in the average time taken to reach agreement, from 11.3 months in 2014/15 to 17.5 months in 2017/18. There has been a similar proportionate increase in the time taken to reach agreement in 50 per cent of cases, and the longer timeframe is likely to make the process more costly in terms of both time and professional fees.  

As with APAs, there does not appear to be a single reason for the apparent decline in taxpayer engagement with the ATCA process. The demands for transparency made by HMRC, together with the increased costs and management time required to reach agreement, may have started to outweigh the benefit of certainty of treatment, particularly if businesses perceive HMRC’s conclusions to be unfair.

The introduction of the CIR legislation is also likely be a contributing factor. Many of the businesses affected by these rules would historically have held ATCAs. These businesses may now be disinclined to negotiate such an agreement with HMRC, only to then perform complex CIR calculations which potentially restrict interest deductions below the agreed ATCA amount.   


There is no doubt that the ATCA and APA processes should be rigorous and thorough, but the statistics appear to indicate reduced taxpayer engagement with these formal arrangements. This may be due in part both to HMRC’s approach and, in respect of the ATCA, to the new CIR legislation. Whatever the explanation, a question mark must exist over the future of APAs and ATCAs in their current form.

For more information please get in touch with Suze McDonald, Peter Coe or your usual RSM contact.