HMRC has published the statistics for Transfer Pricing (TP) and Diverted Profits Tax (DPT) tax collection in 2020/21. The data cover a wide spectrum of its enforcement activities including: information on additional taxation collected, duration of engagements and numbers of open/settled engagements with taxpayers across TP, DPT enquiries as well as APA, ATCA, MAP and PDCF processes.
The data clearly indicates a trend towards more complex engagements resulting in longer resolution times and higher tax yields – both increasing costs to international businesses. Taxpayers across all market segments and industries are also paying close attention to these developments and are adapting their processes and risk mitigating strategies when in it comes to intragroup dealings.
Targeting
HMRC clearly continue to view TP as a key area of focus and are devoting considerable resources as part of their “resource to risk” compliance policy. TP enquiries have resulted in highest ever yields for HMRC, increasing sharply to pass £2 billion for the first time. While this is in part a result in changes in the way HMRC are reporting TP yields, the marked raise in yield from a similar number of settled enquiries points to increased complexity of underlying issues. This further complexity has had an effect on the average time to settle which has gone up to 36 months.
The number of applications for both the Advance Pricing Agreements (APA) and Advance Thin Capitalisation Agreements (ATCA) has reduced compared to the previous period. While the ATCA programme continues to be impacted by the adoption of the Corporate Interest Restriction rules in 2017, the interest in the APA programme is tempered by the length of the process which has seen average agreement times climb to an unprecedented 55.5 months. The amount of time needed to reach agreement brings into question the viability of new applications and has contributed to a record 11 applications being withdrawn.
On the other hand, the number of Mutual Agreement Procedure (MAP) applications for discussions between the UK and other jurisdictions has risen by close to 50% year-on-year. This increase is consistent with a rapid uptick in audit activity across the UK and globally and has also had an impact on the average time to resolve a case which has increased to 34 months.
Diverted profits tax
The statistics related to DPT follow the outlined trend of more complexity and value, manifested in considerable increase in both the yield from DPT directly but especially in the spin off additional tax resulting from TP settlements which more than doubled year-on-year to £1.4 billion. TP settlements are effectively a way for taxpayers to avoid paying tax at the higher rate of DPT and the settlement yield for the period represents a significant milestone and evidence that DPT remains a very effective tool for HMRC to deal with what it views as “contrived arrangements” that taxpayers may have in place.
Profit diversion compliance facility (PDCF)
HMRC’s latest statistical data provides the first more detailed insight into the running of the PDCF since the launch of the compliance facility in 2019. The first full year has seen 22 resolved cases with an average resolution time of 12 months from the registration meeting. According to the data, 96% of the resolved cases saw HMRC accept the final proposal resulting in £305 million of additional tax revenue. While it is early days, it would seem that the PDCF has been a success for HMRC. Putting the process in the wider context of all dispute resolution options available to international companies, the PDCF, as a taxpayer lead process, may represent the fastest route to resolution. However, judgment on this should be reserved until more contentious PDCF applications have gone through the full process.
Protecting your group from future HMRC action
The published yields resulting from TP and DPT enquiries make it clear that they will remain a rewarding area for future HMRC enforcement activity. It is also clear that dealing with the increased complexity of issues raised in enquiries can present significant challenges for taxpayers both in terms of time and resources.
The most effective and cost-efficient ways for groups to manage down these risks depend on taking advance action – well before tax returns are submitted and any TP enquiry is raised. Some of the steps to consider are:
- Conducting regular TP policy reviews
- Raising the level of TP awareness within the organisation
- Incorporating TP standards into operating policies and procedures, and
- Engaging with HMRC prior to submitting tax returns.
Once an enquiry has been initiated managing interactions with HMRC become critical. Taxpayers are well served by taking specialist advice early and adopting a collaborative working approach with the HMRC case team. This often includes agreeing an action plan at the outset of the enquiry and making every effort to keep to the agreed deadlines, including challenging the HMRC case team when its deadlines appear to be slipping.
For help and advice on any transfer pricing or international tax dispute please contact Claire McGuigan.