Tax investigations now taking over three and a half years to settle – four months longer than last year

• HMRC’s latest disclosure facility gives businesses the chance to avoid investigations

The increasing length of these tax disputes is very disruptive to businesses as they can drain management time and cause lengthy periods of financial uncertainty.

Jason Collins, Partner at Pinsent Masons, comments: “Businesses need certainty to plan efficiently – putting them in legal limbo for years on end undermines that certainty.”

“Whilst businesses might be able to easily afford the direct financial cost of a tax dispute, the broader impact of these investigations can be very damaging in terms of eating up crucial management time and distracting the focus of the business. At times a HMRC investigation can make a business feel like it is under siege.”

HMRC’s strategy for dealing with tax investigations can work against reaching a quick resolution of an inquiry. The ‘Litigation and Settlement Strategy’ (LSS), which was designed to resolve tax disputes with a consistent framework, makes it difficult for individual HMRC teams to settle disputes for less than the full amount of tax initially identified by HMRC as potentially underpaid.

Jason adds: “HMRC’s inflexible approach to tax avoidance is driving delays as it frequently aims to win every point against the business. This can make it difficult to settle even the simplest disputes.  It can lead HMRC to deploy its resources inefficiently.”

Pinsent Masons says, one reason for the length in time taken to resolve disputes could be that HMRC is increasingly pursuing complex tax investigations with a cross-border element, which typically take longer to settle.

Many of these tax investigations often relate to Transfer Pricing disputes. Transfer Pricing is the necessary charges made between parts of a multinational business for the transfer or shared use of goods, services or intangible assets. Tax rules provide that transactions between connected parties should be taxed as if they were on arm's length terms. However, it can be difficult to work out what an arm's length price is for some goods and services.

Diverted Profits Tax (DPT) was introduced in 2015 as an additional tool for HMRC to use against multinationals who have structured their operations so that they pay little UK tax. DPT aims to incentivise businesses to restructure their cross-border arrangements to bring more profit into the UK at the lower 19% Corporation Tax, rather than risk a 25% DPT charge on those profits by maintaining the status quo.

HMRC’s new disclosure facility allows businesses to avoid investigation

HMRC’s new disclosure facility relating to 'profit diversion' gives multi-national businesses the opportunity to avoid an investigation and settle any tax owed for diverting profits overseas. Businesses that make a disclosure under the Profit Diversion Compliance Facility often face lower penalties than they otherwise would have.

Jason Collins adds: “HMRC’s latest disclosure facility shows that HMRC is clamping down on what it views as businesses diverting profits from the UK though aggressive, out of date or erroneous transfer pricing.  It gives those businesses a window to fix the past in line with HMRC's thinking without the need for an HMRC investigation. In order to avoid being tied up for years in a dispute with HMRC many businesses may opt to take this route.”

"HMRC is devoting significant resource to investigating large businesses it suspects of diverting profits from the UK and already has a number of businesses in its sights. All cross-border businesses need to check their transfer pricing policies reflect what actually happens on the ground."

"These figures show how long an HMRC investigation can drag on. The profit diversion compliance facility offers the prospect of a speedier resolution, with the business having much more control over the investigation process."

*Year-end 31 March