Rise in UK tax suspected underpaid by large businesses

Tax under consideration is HMRC’s estimate of the maximum potential additional tax liability in each case before it has carried out a full investigation of the specific facts or analysis of relevant law. The figures show the amount of tax under consideration on 31 March 2021 by HMRC’s large business directorate, which covers around 2,000 of the UK’s largest and most complex businesses.

The figures include £8.1bn in tax believed to have been avoided through transfer pricing - the way multinationals allocate their costs and income between different countries. Another £1.2bn is believed by HMRC to have been underpaid by large businesses due to ‘base erosion’ – the practice of businesses shifting profits from the UK to lower-tax countries.

Base erosion has been in the political spotlight in recent years, with the OECD announcing in October 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.

Another major contributor to the rise is suspected underpaid employment taxes, which have risen 49% to £1.3bn in the past year from £900 million the year before.

April 2021 saw a major change in the tax treatment of ‘off-payroll’ workers in the private sector, with businesses becoming liable for determining the employment tax status of contractors who work through personal service companies and other intermediaries. As a result, many more workers are expected to be classified as employees rather than self-employed, increasing the amount of employment taxes owed by businesses.

The amount of tax HMRC believes has been underpaid by the UK’s biggest businesses has now risen for six years in a row. It was £19bn in 2014-15.

“Multinationals underpaying tax is one of the biggest areas of concern for HMRC,” said Steven Porter, a tax disputes expert at Pinsent Masons. “The biggest businesses can expect to see HMRC continue to toughen its stance on it.”

“The Large Business Directorate is particularly effective at bringing in the underpaid tax it identifies. It prefers to do this through negotiation initially, but it is certainly not afraid to move to large-scale investigations and litigation if it has to,” he said.

The government is planning to take steps to resolve long running large business tax enquiries more quickly, it announced in a report published recently following a review of large businesses’ experiences of UK tax administration. In particular, HMRC has been exploring ways to improve transfer pricing enquiry effectiveness, as these enquiries can be particularly lengthy.

HMRC is planning to establish new objective indicators of long-running enquiries and a clear and transparent process to accelerate their resolution, the report says. Where the indicators are present, there will be a process for businesses to challenge long-running enquiries. HMRC expects work to agree the indicators and process to take place in early 2022, according to the report.

“The length of time it takes to resolve some HMRC enquiries has long been a gripe of large businesses and their advisers. It is good that HMRC has listened to the feedback and is looking to improve its systems and procedures,” Porter said. 

HMRC also plans to work with businesses to consider how cooperative compliance best practice can be delivered more consistently, focusing on clarity and transparency on governance processes, project planning in relation to enquiries and clarity on the role of the HMRC customer compliance manager (CCM) in resolving disputes and taxpayer questions. HMRC’s existing Framework for Cooperative Compliance includes HMRC and the business working collaboratively, pro-actively and transparently, engaging in open and timely dialogue on a real time basis and responding to queries in a timely fashion.

HMRC also intends to provide additional clarity on HMRC’s assessment of risk, technical views and likely responses to specific areas as well as improving existing published technical guidance.