Out-Law / Your Daily Need-To-Know

Out-Law Analysis 3 min. read

Transfer pricing disputes: check HMRC complies with procedure

Businesses facing a new transfer pricing enquiry or business risk review from HM Revenue & Customs (HMRC) should consider points of procedure early on, to ensure that HMRC actually has the power to do what it is purporting to do.

Successful arguments on procedural points regarding transfer pricing enquiries, closing notices and assessments can mean that HMRC is unable to assess any tax it considers to be underpaid as a result of transfer pricing disputes, either for a particular accounting period or altogether, which could substantially reduce any liabilities for penalties.


HMRC can enquire into a tax return but it needs to give notice to the taxpayer within the enquiry window which, assuming the return was filed on time and the company is a member of a group that is not small, is 12 months from the statutory filing date. It can only open one enquiry into each return.

If HMRC purports to issue a closing notice, it is important to check whether HMRC opened an enquiry into the return within the time limit, whether it notified the taxpayer of the opening of the enquiry and that it had not already closed another enquiry into the relevant return.

Successful arguments on procedural points can mean that HMRC is unable to assess any tax it considers to be underpaid as a result of transfer pricing disputes

Where HMRC is now seeking to look back, and may have already considered a transfer pricing issue previously, it is also important to consider whether there is any argument that is has already issued a decision on an issue in earlier years and to consider whether to mobilise any judicial review remedies.

Discovery assessments

Even if the enquiry window has passed or HMRC has already issued a closure notice in relation to an enquiry into the return, HMRC can still recover tax it considers to be unpaid if it has grounds to issue a discovery assessment.

HMRC can issue a discovery assessment if an HMRC officer ‘discovers’ an underpayment of tax and:

  • the potential under-assessment of tax was brought about carelessly or deliberately by the taxpayer or a person acting on the taxpayer’s behalf; or
  • at the time when an HMRC officer ceased to be entitled to open an enquiry into the return or issued a closure notice in respect of an existing enquiry, the officer could not reasonably have been expected, on the basis of the information available to them at that time, to be aware of the under-assessment of tax.

Before HMRC can issue a closure notice or a discovery assessment in relation to transfer pricing it must obtain a “Commissioners’ sanction” – a further step requiring central sign off within HMRC to ensure consistency of treatment.

A copy of the Commissioners’ sanction must be sent to the business before or at the same time as the issue of the assessment, otherwise the closure notice or assessment will be invalid. It is therefore important to check that this has happened.

Time limits

Even if HMRC can show it has made a discovery that tax has been underpaid as a result of transfer pricing and that the conditions for the raising of a discovery assessment are satisfied, it can only raise an assessment within the statutory time limits. The normal time limit is four years, but this is increased to six years in the case of carelessness or 20 years in the case of deliberate conduct.

HMRC is increasingly alleging deliberate conduct on the part of taxpayers in order to access the longer 20 year assessment time limit. There is also now a 20 year time limit for failure to notify chargeability to UK corporation tax without the need for HMRC to show particular conduct. This is, for example, relevant to non-resident companies which HMRC asserts should be UK resident or have a UK permanent establishment (PE).

The law surrounding discovery assessments has been clarified in a recent Supreme Court decision. This confirmed in particular that for an inaccuracy in a return to be deliberate there has to be an intention to mislead HMRC or possibly recklessness about whether the return would mislead HMRC.


Usually where HMRC is challenging transfer pricing it will allege that the business has been at best careless in not giving sufficient thought to establishing and supporting an arm’s length transfer pricing policy or in not properly implementing an appropriate policy. This could give rise to a penalty of up to 30% of the potential lost revenue.

HMRC may allege that inaccuracies are deliberate, which enables it to charge a higher maximum penalty of 70% of potential lost revenue where there has been no attempt at concealment.

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