The UK tax authority increased its estimates of how much tax multinationals may have avoided through diverting profits overseas by more than 50 per cent during the last financial year, to £5.8bn, as it ramps up efforts to tackle aggressive avoidance tactics.
The sharp increase in challenges over “transfer pricing” arrangements — transactions between different corporate entities belonging to the same multinational group — is likely to reflect a rise in inquiries following the introduction of the so-called “Google Tax”, according to Pinsent Masons, the law firm that obtained the figures.
The new levy, officially called the Diverted Profits Tax, was introduced in 2015 by former chancellor George Osborne in an attempt to crack down on multinational companies that avoided tax by shifting profits that were originally generated in Britain to lower-tax jurisdictions.
Ian Hyde, a partner at Pinsent Masons, said: “The tax affairs of the UK’s largest businesses are a top priority for HM Revenue & Customs, particularly the use of cross-border structures including the possible manipulation of pricing methods. HMRC has been investing in transfer pricing specialists and this is clearly reflected in the figures.”
The tax authority said: “Since 2010 HMRC has brought in over £53bn by effectively policing the tax rules as they apply to large businesses. This includes over £8bn from large businesses in 2016/17 alone.”
HMRC said last month that Britain’s take from the contentious levy rose nine-fold to £281m in 2016-17. Drinks company Diageo and Glencore, the Swiss miner and commodity trader, were among the 14 companies affected by the tax.
Sanjay Mehta, a partner at law firm Katten Muchin Rosenman, said: “The standards of what is acceptable in transfer pricing have changed. Large corporates are now increasingly finding their transfer pricing methodologies of yesterday being challenged.
“HMRC has invested heavily in the area of transfer pricing as this is an area of growing complexity and there is a recognition of historic underpayment of tax by some large corporates.”
Transfer pricing now represents nearly a quarter of the total £25bn tax potentially underpaid by large businesses last year — up from 17 per cent the previous year, according to Pinsent Masons.
The figures refer to HMRC’s “tax under consideration” — an estimate of the maximum potential additional tax it can retrieve from companies before full investigations have been completed.
Dan Neidle, a partner at Clifford Chance, said: “HMRC is being more aggressive as a result of the pressure it’s under. Much progress has been made in the last few years by closing down avoidance schemes. So HMRC’s only way to respond to the pressure is by pursuing companies on points where there is technical disagreement as to the position, rather than classical tax avoidance. Transfer pricing is an obvious avenue for this.”