HMRC suspects foreign owned companies responsible for nearly half of underpaid tax

Pinsent Masons says that the figure undermines suggestions that HMRC takes a light touch approach to overseas businesses that operate in the UK.

Representatives from Starbucks and Google will appear before the House of Commons Public Accounts Committee on Monday 5 November to answer questions about their UK tax affairs.

Says Jason Collins, Head of Tax, of Pinsent Masons: “HMRC actively targets foreign-owned companies within the UK to see if they owe any extra tax.”

“There is the perception that HMRC and the Treasury are so eager to attract foreign companies to the UK that they are happy to take any tax payment that they get. That just isn’t the case.”

Information disclosed by HMRC shows that (as of March 31 2011) it estimated that large foreign-owned businesses are responsible for as much as £11billion of the £25billion that HMRC has identified as tax revenues that may be at risk from all large businesses in the UK*.

However, Pinsent Masons says that large, foreign-owned businesses are unlikely to have broken any UK laws in minimising their UK tax liabilities.

Jason Collins adds: “Only a fraction of that £11billion is actually owed to HMRC. Aggressive tax avoidance amongst large companies just isn’t as widespread as some would have us believe.” 

"HMRC itself recognises that the £11bn is just the total tax ‘under consideration’ and its experience is that, when they look across all relevant issues under enquiry, only around half of the estimate of tax under consideration is eventually brought into charge.”

Following recent press reports about the low level of taxes paid in the UK by Starbucks, there have been calls for changes to transfer pricing rules to prevent tax deductions for the purchase goods or services between group companies in different countries – as has happened with Starbucks.

However, Pinsent Masons says that a rule change would be unnecessary.

Jason Collins explains: “The transfer pricing rules already prevent deductions for ‘excessive’ payments for goods and services between companies. Starbucks UK’s payment of a royalty fee to the Starbucks European headquarters for using the Starbucks brand isn’t out of the ordinary.”

“All the evidence is that HMRC is very proactive in challenging transfer pricing arrangements that it does not like. Besides, in HMRC’s overall list of priorities [see below] for missing tax, transfer pricing is quite low down.”

Jason Collins adds: “If you look at the UK operations of Starbucks, it pays a royalty fee of 6% of sales for the use of Starbucks’ intellectual property. It’s very similar to a franchise operation: a company like Subway, for example, charges its franchises 8% for the use of the Subway brand.”

Jason Collins says that foreign owned businesses do not get an easy ride from HMRC.

Explains Jason: “If anything there is a feeling that HMRC’s tough approach to businesses can put off possible inward investors.”

“HMRC enquiries into companies can be incredibly tense, time consuming, and, at times, confrontational.”

 “The UK’s corporation tax rate may be becoming more competitive, but the UK will only fully benefit from that if we can prove to overseas companies that the compliance work of HMRC is not an unreasonable burden.”

*Through HMRC’s Large Business Service – the Large Business Service is responsible for the taxes paid by the 770 largest businesses in the UK. “Tax under consideration” may include both potentially underpaid tax and the risk to the Exchequer from companies litigating over amounts of tax they have overpaid.

Foreign owned companies and their UK tax bills

Areas of concern to HMRC - ranked in order of importance (based on available HMRC data) 

1. International (including cross border arbitrage)
2. Statutory allowances/reliefs
3. Financial instruments
4. Leasing
5. Trading, computation of profits, receipts and deductions
6. Disputes over tax reliefs, rebates, exemptions
7. Schemes and trusts
8. Transfer pricing and thin cap
9. Output tax under declared
10. Accounting standards
11. Employee and director issues
12. Expenditure and expenses
13. Misapplication of VAT reliefs
14. Input tax over claimed

Note: CFC issues have been excluded from the table above, as they are primarily relevant to UK-owned groups.