HMRC increasing its scrutiny of transfer pricing agreements

Hillier Hopkins LLP

Chartered Accountants & Tax Advisers

Call +44 (0)330 024 3200 and discover how we can help you.

“HMRC has invested significant time in training staff to deal with international issues, including transfer pricing, and continues to recruit staff in this risk area”

Source Government publication, Transfer Pricing and Diverted Profits Tax statistics, 2020 to 2021.

The additional resources HMRC have invested in their transfer pricing investigations team has already resulted in collecting their highest yield on record and they plan to allocate further resources.

Transfer pricing refers to the rules that govern the pricing of transactions between entities under common ownership or control. This most commonly impacts on charges made between different parts of a multinational businesses for goods, services, or intangible assets.

HMRC are making it increasingly difficult for large multinational corporations to shift profits to lower tax jurisdictions.

Tax legislation states that transactions between connected parties should be taxed as if they were on an arm’s length basis.

HMRC believes that some multinational companies are making errors, misrepresenting, or taking an aggressive approach on accounting for internal transactions to reduce their tax liabilities in the UK.

Figures published in April 2022 showed a 49% increase in extra tax collected from investigations into large corporates shifting profits overseas (£1.45bn (2019-2020) to £2.16bn (2020-2021)).

HMRC has stated that it will now consider transfer pricing strategies for criminal investigation where applicable. HMRC will reserve criminal investigations to cases where they believe companies have been dishonest in their use of transfer pricing to deliberately hide profits. This includes actions such as falsifying documents or misleading HMRC with false information.

If found guilty, individuals face custodial sentences and the prospect of a lengthy investigation and, if convicted, an unlimited fine along with significant reputational damage.

During investigations, HMRC have increased their focus on understanding the behaviours which led to any inaccuracy in the returns. The assessment of the behaviours can have implications on both the penalty chargeable and assessing the position for discovery assessments, if HMRC considers there has been “carelessness” or “deliberate” behaviour.

HMRC have the power to investigate previous years if they discover a loss of tax. If they deem the underpayment of tax as result of a deliberate behaviour, they can go back up to 20 years by raising a discovery assessment.

If there has been carelessness or deliberate behaviour, HMRC will charge a higher percentage of the underpaid tax as a penalty.

It is important to ensure that intragroup transfers are compliant with tax legislation. We can provide specialist advice on accounting for intragroup transfers to ensure your business remains complaint.