Taxpayer successfully challenges HMRC information notice in long-running transfer pricing row

Lifeplus Europe had appealed against a statutory request from HMRC for overseas parent company financial statements and associated materials as part of a transfer pricing dispute that has lasted nearly a decade.

The first-tier tax tribunal rejected HMRC’s claims that this specific information was reasonably required. The tribunal did not accept HMRC’s position that its repeated requests showed it needed the information – and ruled it had not followed its own guidance on dealing with the transfer pricing enquiry.

Ian Robotham, a tax expert with Pinsent Masons, said it emphasised there is a burden of proof on HMRC to justify their information demands.

“This decision is a timely reminder that HMRC’s requests for information must be reasonably required, and the Tribunal is prepared to push back when that standard is not met,” he said.

“It is not enough for HMRC just to say ‘we need the full facts’ – when considering whether information sought is reasonably required, there has to be a clear connection between the documents sought and the issues under enquiry.

“It’s a welcome example of the Tribunal taking a practical, balanced approach to what information can and can’t be required to be produced by a taxpayer in lengthy and complex tax enquiries.”

The tribunal heard that HMRC originally opened an enquiry in December 2016 into Lifeplus’ tax return for the accounting period ended 31 December 2014, and had opened one each year afterwards until 2023. In March 2017, after a request for further information relating to transactions between the firm and its parent company in the US, Lifeplus’ agents informed HMRC of the existence of a Transfer Pricing (TP) Policy report and subsequently shared it with HMRC.

As part of the revenue body’s ongoing focus on the transfer pricing approach used to value goods and/or services transferred between Lifeplus and its parent firm, HMRC requested significant amounts of information including documents specifically related to the parent company’s financial statements.

While Lifeplus provided a huge volume of information, including 29,000 emails, and HMRC made multiple site visits and conducted interviews with a number of personnel at Lifeplus, HMRC continued to pursue the parent company’s financial statement information. However, the US-based parent company rejected a request for that information on the grounds of an entitlement to privacy and not being within HMRC’s jurisdiction, and that it had provided relevant information to the company which prepared the transfer pricing policy. HMRC also sought the information from its US equivalent, the IRS, without success.

The tribunal rejected HMRC’s claims the documents were necessary, pointing to the considerable information that had already been provided, adding HMRC had been focused on the selection of one transfer pricing method over another.

“It is clear, therefore, that it is not for HMRC to unilaterally impose a selection of the transfer pricing method without any input from the tested party,” the tribunal found.

“It is also clear from the information before us that the transfer pricing method employed by the Appellant does not rely upon the Parent Company accounts. We are satisfied that the Parent Company’s financial statements will not provide further detail on the functional analysis of the entities, nor will they assist HMRC in understanding the functional profile of the businesses.”

The tribunal also said it drew an adverse inference from the fact the revenue body failed to call any witnesses beyond the original case officer, who was not a specialist in transfer pricing, despite having specialists attending the hearing, and it had failed to give a rational explanation of why it wanted the documents.

It also rejected HMRC’s claim that as the UK and US parent firm shared directors, they were in a position to require the documents be provided – which the tribunal said went against the principle of each company in a group being a separate entity.

Jake Landman, a tax disputes expert with Pinsent Masons, explained how important the case was, given there is still little UK case law relating to transfer pricing disputes.

“Although this case relates to information sought as part of a transfer pricing enquiry rather than deciding the underlying transfer pricing issue, the Tribunal nevertheless surveyed some of the transfer pricing background as a necessary lens to review the information notice,” he said.

“The Tribunal highlighted that HMRC had not suggested that the transfer pricing specialist had prepared their report otherwise than in accordance with the OECD Guidelines.

“Some of the Tribunal’s comments suggested that they considered HMRC were just unilaterally trying to impose an alternative transfer pricing methodology without giving due weight to the taxpayer’s position.”