The UK’s HM Revenue & Customs (HMRC) on 7 February released annual transfer pricing and diverted profits tax (DPT) statistics for the year ended 31 March 2022.The latest statistics show that during the 2021/22 tax year, HMRC settled a record 175 transfer pricing enquiries, and that the time it took to resolve those cases fell slightly, although the average dispute still takes 34 months to resolve.
It is tempting to think that the increase in the number of enquiries resolved is due to catching up on a COVID backlog, but it may simply reflect the fact that the cases handled were more straightforward, given the fact that the tax yield from these enquiries fell sharply to GBP 1.48 billion, an average of GBP 8.5 million per case. This compares to the record GBP 2.16 billion collected in 2020/21, an average of GBP 17.4 million per case.
The number of advance pricing agreements (APAs) that HMRC agreed with multinationals in the year dropped to just 20, whereas the number of companies applying for an APA increased to a record 40. The new applicants will note that it now takes nearly five years on average to finalise an APA.
The size of HMRC’s team working on transfer pricing has decreased 12.5% over two years, which may help explain why the time it took to agree advance thin capitalisation agreements (ATCAs) increased from 28 to 44 months, despite the number of ATCAs falling to a mere seven in 2021/22, down from 23 in 2020/21.
Here the impact of COVID may be greater, given all the disruption it caused to international supply chains. It is perhaps no surprise that the demand for APAs is increasing. Given the value of APAs in managing transfer pricing compliance risk, it is concerning that they take so long to finalise and that HMRC’s APA team has shrunk again.
With mandatory documentation rules being introduced for the first time this spring and the record number of enquiries being settled, it will be interesting to see whether HMRC deploy more staff to work on transfer pricing matters.
Diverted profits tax bedding in
HMRC also published statistics on tax collected from the diverted profits tax (DPT), which show a 30% increase in DPT collected to GBP 198 million, although the other corporation tax adjustments triggered through the DPT reporting regime (as HMRC investigates the reporting company) fell by over GBP 1 billion.
The DPT rules have now been in place for seven years and it seems that we are approaching a steady state, with fewer new notifications from businesses - just 30 - and perhaps fewer major tax settlements for HMRC to pursue. This should be counted as an achievement for the UK government’s corporate anti-avoidance campaigns.
Protecting your group
These statistics make it clear that transfer pricing compliance and the DPT will remain a rewarding area for future HMRC enforcement activity, and dealing with a challenge from HMRC is not getting any easier in terms of time and resources.
As always, the most cost-efficient way for groups to manage these risks is to take a holistic approach and take advance action well before tax returns are submitted and any enquiry is raised. The key steps to consider include:
- Conducting regular transfer pricing policy reviews
- Raising the level of transfer pricing awareness within the organisation
- Ensuring documentation is kept up to date for all countries in which the group operates
- Incorporating transfer pricing standards into operating policies and procedures
- Engaging with HMRC prior to submitting tax returns
For help and advice on any transfer pricing or international tax disputes, please contact the authors.