14 February 2023
HMRC recently released its annual transparency data around transfer pricing and diverted profits tax. Broadly, the UK’s transfer pricing rules require transactions between connected parties to be priced on arm’s length terms for UK tax purposes. The rules generally apply to large and certain medium-sized businesses. In-scope businesses are required to have documentation to support their compliance with the rules. Diverted profits tax is a special tax designed to address the shortfall in UK corporation tax revenues that can arise due to international tax planning structures adopted by large multinational businesses.
Additional tax revenues of £1,482m were raised during 2021-2022 from transfer pricing enquiries and related engagement with taxpayers. Although down from the £2,162m in 2020-2021, it remains roughly on a par with each of the four years before that. 175 cases were settled during the period – up from 124 cases for the preceding year – and on average, each case took 34 months to settle, remaining roughly in line with prior years. It is worth highlighting that this is an average for settled cases and that some cases, included some that remain unsettled, could take much longer.
This shows that the compliance risk is twofold for businesses falling within the transfer pricing rules.
There is the headline risk of a transfer pricing adjustment, which itself could give rise to additional tax, interest and penalties: a straightforward division of HMRC’s yield by the number of settled cases indicates that large amounts are involved.
Alongside this is the resource commitment that a three-year enquiry requires, together with the associated uncertainty over the tax cost which must be addressed with stakeholders. These enquiries almost always place extensive fact-gathering and information management obligations on a business which also has its day-to-day responsibilities. Nor is this only a retrospective risk, as HMRC is increasingly engaging in real time through the Profit Diversion Compliance Facility with multinational taxpayers that it feels are at risk from diverting profits away from the UK. The Profit Diversion Compliance Facility is aimed at multinational companies whose transfer pricing arrangements might bring them within the scope of diverted profits tax. It allows companies to make a disclosure before HMRC launches an investigation.
Businesses within the transfer pricing rules need to be confident that their tax governance processes deliver not just robust transfer pricing documentation but also effective management of the supporting information that an enquiry requires. This is an ongoing concern, not something that can be left until an enquiry arrives. For their part, we urge HMRC to bring down the average time it takes to settle a transfer pricing enquiry through a clearer understanding of the information required and a more direct approach to concluding on the position.