Businesses ‘under siege’ as tax investigation settlements 'drag on'

The average length of time for HMRC to settle an investigation into a large business was 43 months in the year to 31 March 2019, four months longer than the previous year.

Tax expert Jason Collins of Pinsent Masons said the length of time investigations were now taking was having a negative impact on businesses.

“Businesses need certainty to plan efficiently – putting them in legal limbo for years on end undermines that certainty,” Collins said

“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,” Collins said.

The increased length of time investigations are taking, as well as a growing backlog of disputes waiting to be heard by the first-tier tribunal, could be attributed to HMRC’s Litigation and Settlement Strategy. The strategy sets out a consistent framework for handling tax cases, but makes it harder for HMRC to settle an investigation for less than the amount of tax initially identified as underpaid, said Collins.

HMRC is also pursuing more complex, cross-border tax investigations than it used to, which often take longer to settle. These disputes relate to issues such as transfer pricing or the way companies have structured operations to minimise the UK tax they pay.

In January 2019 HMRC launched a new disclosure facility, which gives multi-national businesses the opportunity to avoid an investigation and settle any tax owed for diverting profits overseas. The Profit Diversion Compliance Facility is primarily aimed at technology and e-commerce companies and those businesses using it can reduce the amount of penalties they have to pay.

“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shows that HMRC is clamping down on what it views as businesses diverting profits from the UK though aggressive, out of date or erroneous transfer pricing.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,” Collins said.

“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,” Collins said.

Collins said HMRC had a “number of businesses in its sights” as it looked to clamp down on tax diversion, and recommended that all businesses should check their transfer pricing policies to make sure they reflected how firms were actually operating.