Multinationals have been using HMRC disclosure facilities more than in the past, paying £70m in unpaid tax after diverting profits overseas to reduce tax bills
HMRC has collected more than £70m in extra tax in the 2022-23 tax year as more multinational businesses admitted profit shifting.
The tax authority also opened 147 new investigations in the 2022-23 tax year into business use of transfer pricing. The 18% rise in activity came as HMRC ramped up investigation activity after a slowdown during the pandemic years when HMRC only opened 105 probes into corporations in 2020-21, showed analysis from law firm Pinsent Mason.
Profit shifting sees multinationals using low tax jurisdictions to park profits to avoid tax. Multinationals use transfer pricing – the allocation of costs and income between business units in different countries – to reduce the tax paid in the UK.
This has become a major area of focus for HMRC due to the sheer scale of the tax potentially lost. In 2022, HMRC estimated that it may have lost up to £9.3bn in tax in this way in the 2020-21 tax year.
The paltry £70m figure shows that HMRC needs to start taking tougher action to curb abuse of the corporation tax regime.
Sam Wardleworth, senior associate at Pinsent Masons, said: ‘HMRC is now particularly vigilant to multinationals diverting profits abroad to reduce their UK tax bills. It is an area where HMRC is increasingly focusing its investigations. Any that have done so should consider coming forward to avoid the worst penalties.’
Corporates have come forward and paid the £70m voluntarily through HMRC’s profit diversion compliance facility, which was set up in 2019. Using this facility, businesses can disclose structures or arrangements that would fall foul of the diverted profits tax, which is charged at a higher rate than corporation tax. The facility also potentially allows them to secure reduced penalty rates.
Diverted profits tax is charged at a higher rate (currently 31%) where multinationals have diverted profits from the UK either by using entities or transactions that ‘lack economic substance’ or by using arrangements specifically to avoid creating a taxable presence in the UK. Businesses often book profits in lower-tax jurisdictions such as Ireland, where the corporation tax rate is 12.5%.
The £70m in tax recovered through the facility in 2022/23 represented a rise of 3% on the £68m recovered in 2021/22 and a 79% increase on the £39m recovered in 2020/21.
Wardleworth said encouraging businesses to resolve their tax affairs voluntarily is a key part of HMRC’s strategy to reduce the amount of tax lost through profit shifting.
‘HMRC’s approach has been quite successful in persuading multinationals to come forward and admit they have shifted profits overseas and reduced their tax in the UK. The alternative is a costly tax investigation, which both businesses and HMRC would prefer to avoid,’ said Wardleworth.
‘Businesses that wait for HMRC to investigate them are more likely to be hit with higher ‘geared penalties’. That can quickly become very expensive. Proactively engaging with HMRC to deal with the problem is likely to be a far better approach.
‘The benefits of using the profit diversion compliance facility are clear – it generally takes less time and costs less than an investigation and often results in lower penalties.’