HM Revenue & Customs (HMRC) has opened investigations into multiple companies to combat transfer mispricing and tax fraud since its first case in 2018. The UK revenue authority is going after corporations with inconsistent TP practices, but the majority of these cases are settled with an extra tax payment.
“Most of these investigations are resolved by the business agreeing to change its transfer pricing and pay additional corporation tax. However, where there is evidence of dishonesty then, as in all dishonesty cases, we will consider opening a criminal investigation,” said an HMRC spokesperson.
HMRC reserves criminal action for the most serious cases to set a deterrent. The revenue authority could technically seek criminal charges in cases where sufficient evidence of fraud is found, but HMRC declined to confirm whether it has done so in any of its live investigations.
“Most of the cases seem to rest on a representative of the company misrepresenting the position when asked about the company’s affairs,” said Jason Collins, partner at Pinsent Masons.
“HMRC tends to shy away from prosecuting companies as it need to be able to fix any dishonesty to the most senior people in the company,” he explained. “Where it cannot show such a conspiracy, these recent developments suggest HMRC will focus its efforts on pursuing the ‘lone wolf’ dishonest individual instead.”
Companies fear that this will expose them to more penalties and controversy since misstatements might be interpreted as dishonesty. “Even if HMRC cannot show it was a deliberate misstatement, the tax head will open the company up to large penalties if the statement was made honestly but carelessly,” said Collins.
Taxpayers should make sure their past statements are consistent with their TP arrangements. Even an honest mistake could incur new costs for a business.
Tough enough?
The news of the investigations has sparked a debate on social media over whether HMRC is taking the right approach and whether civil disputes should be escalated. Some tax professionals are concerned HMRC might overstretch what should be civil disputes.
“Where taxpayers lie or cheat then HMRC is absolutely right to pursue criminal sanctions. What mustn’t happen is escalating a civil dispute into a criminal investigation for purely tactical purposes,” said Dan Neidle, partner at Clifford Chance in London.
Meanwhile tax campaigners are much more supportive of escalating such cases. Richard Murphy, director of Tax Research, hopes that HMRC is using country-by-country reporting (CbCR) data to help determine whether allegations should be pursued as criminal cases.
“Country-by-country reporting does not prove a transfer mispricing case,” stressed Murphy, adding that “it can very strongly support the suggestion that there is systemic abuse from high to low tax jurisdictions both in a period and over time.”
“In that case, I hope HMRC are using it for that purpose, because that was my intention,” he continued. “And if that turns civil cases into criminal ones, that is all to the good.”
At the same time, HMRC has delivered many criminal charges and closed even more civil investigations. HMRC’s Fraud Investigation Service (FIS) delivered 85 criminal charges in 2019/20 and closed 675 civil investigations across all areas.
The FIS director has confirmed that there are live investigations into “some very large corporates where individuals within those companies have lied to us”.
“So let’s say a large organisation is talking to us about transfer pricing and that’s going on as a civil tax discussion but within that there’s some false documents filed or some lies told, then absolutely we’d go down the criminal route, however senior they are,” said Simon York, FIS director, in a public webinar in November 2020.
Others see the investigation as one part of a much wider process. Andrew Sackey, former head of corporate criminal investigations at the FIS, called it “the next step” in HMRC’s efforts to “regularise” non-compliant transfer pricing.
“This more aggressive stance makes it even more important that firms examine their profit reporting treatments and consider taking advantage of the civil facility if that is appropriate,” said Sackey, now a partner at Pinsent Masons.
“Above all it’s critical that there is complete consistency in respect of any documents or representations made to HMRC,” he added.
These investigations may mark a turning point in HMRC’s history. In the past, the tax authority has not taken an aggressive approach when it comes to TP arrangements it finds fault with. Instead, HMRC saw such matters as honest disagreements. This may be changing.
