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Foreign-owned companies responsible for third of suspected underpaid UK tax

Foreign-owned companies were responsible for 32% of all the tax suspected to be underpaid by large businesses in the UK as at 31 March 2021, according to figures from HM Revenue & Customs (HMRC).

The figures showed £11.5 billion from a total of £35.8bn suspected to be underpaid.

The figures give a snapshot of the ‘tax under consideration’ by HMRC at 31 March 2021. This is HMRC’s estimate of the maximum potential additional tax liability in each case it is investigating. In many cases, once HMRC has looked at the full facts, the liability may be lower or there may be no further tax owing.

The figures show that large US-owned businesses are believed to be responsible for the highest percentage of the suspected underpaid tax from foreign-owned companies, at 47%, representing £5.4bn of potentially underpaid tax.

“Major US multinationals are now a constant target for HMRC,” said Steven Porter, a tax disputes expert at Pinsent Masons. “The tax authority believes some of them are paying substantially less tax than they owe in the UK.”

Porter Steven

Steven Porter

Partner, Head of Tax Disputes and Investigations

With corporation tax set to rise in just over a year’s time, HMRC and the UK Treasury will be keen to make sure the extra revenue generated does not leak away to lower-tax jurisdictions

The digitalisation of the economy has meant that technology companies can make substantial profits, such as through the sale of advertising targeted at UK customers, without having any substantial physical UK presence.

“Reducing losses to the Treasury from transfer pricing and base erosion is a key target, both for HMRC and for the government. With corporation tax set to rise in just over a year’s time, they will be keen to make sure the extra revenue generated does not leak away to lower-tax jurisdictions,” Porter said.

Using transfer pricing, a multinational business could pay less corporation tax in the UK by charging an inflated price for services, such as the right to use brand names and other intellectual property, to its UK operation. ‘Base erosion’ means shifting profits from UK sales to lower-tax countries such as by claiming not to have a taxable presence in the UK so that profits are taxed, if at all, in a low tax jurisdiction.

The main corporation tax rate rises from 19% to 25% from April 2023.

The OECD announced in October 2021 that 136 countries have signed up to a deal to enforce a minimum corporate tax rate of 15% from 2023. The deal will also allow countries to tax multinationals that make sales within their jurisdictions even if they do not have a physical presence there.

Businesses operating in Switzerland, representing £825 million of potentially underpaid UK tax, and Ireland with £674m of potentially underpaid tax, make up the top three countries along with the US in the list of foreign-owned companies HMRC believes are underpaying UK taxes. Both countries have corporate tax rates below the 15% that will be required from 2023, although Ireland has announced that it will be increasing its 12.5% rate to 15% for firms with a turnover of more than €750m. These are the businesses which will be caught by the OECD minimum tax rate.

“HMRC is now aggressively pursuing transfer pricing arrangements that it sees as artificial and will not hesitate to open investigations where necessary,” Porter said.

“HMRC’s stance on overseas corporates underpaying tax has toughened significantly over the last decade. Given the need to repair public finances after the pandemic, it is only likely to get even more active in terms of investigations in the coming years,” he said.

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