HMRC takes “more aggressive” approach as transfer pricing investigations soar

A 49% uptick in the amount of extra tax collected from investigations into large corporates shifting profits overseas is an indicator that HMRC is ramping up its scrutiny multi-national tax avoidance arrangements, according to specialist law firm Pinsent Masons.

“HMRC is now much more aggressive in tackling what it sees as artificial profit shifting, and much more stringent in its interpretation of what makes an acceptable transfer pricing arrangement,” said Steven Porter, partner and head of tax disputes and investigations at Pinsent Masons.

According to new figures from the 2020/21 tax year, the amount of extra tax collected from transfer pricing investigations into multinational corporates increased from £1.45bn to £2.16bn – HMRC’s highest yield on record.

HMRC suspects that the practice of transfer pricing accounting results in some large businesses artificially reducing their tax liabilities in the UK.

However, the increased scrutiny has made it increasingly difficult for large corporates to shift profits to lower tax jurisdictions such as the Republic of Ireland, according to Pinsent Masons, with businesses advised to be more diligent if they intend to continue using such schemes.

“It is critically important that any intra-group transfers are supported by appropriate economic reports and that the arrangements that are in play are actually operated in the manner that the group intends them to be when established,” Porter said.

While typically settled out of court, HMRC has stated that it will now consider multinationals’ transfer pricing strategies for criminal investigation where applicable.

“We currently have live investigations involving some very large corporates where individuals within those companies have lied to us,” said Simon York, director of HMRC’s Fraud Investigation Service, speaking during the Hansuke Financial Services Tax Conference in November 2020.

“Let’s say a large organisation is talking to us about transfer pricing as a civil tax discussion, but in the course of that some false documents are provided or lies told, then absolutely we would go down the criminal route there in relation to those individuals no matter how senior they are.”

HMRC officially confirmed this to the Financial Times in January 2021, stating that a “small percentage” of large businesses were under [criminal] investigation, with the first having been opened in 2018.

“Where HMRC believes companies have been dishonest in their use of transfer pricing in order to deliberately hide profits, officials have made it clear they will consider criminal prosecution,” said Andrew Sackey, partner at Pinsent Masons and former head of corporate criminal investigations in HMRC’s Fraud Investigation Service.

“If found guilty, individuals face custodial sentences, and multinationals face the prospect of a protracted investigation and if convicted, an unlimited fine and significant reputational damage.”