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HMRC's £5 billion transfer pricing 'naughty step'

Intercompany Agreements

3 February 2020

Changing behaviours is a key part of getting the results that you want, if you feel that things are off track. In the Sutton household, we can't claim that threatening the 'naughty step' has been massively effective in changing the behaviour of our three-year-old, but sometimes it works.

HMRC seems to have had more success with its equivalent of the naughty step in the transfer pricing world: the diverted profits tax (DPT), which was introduced in 2015. On 27 January 2020, HMRC published its latest statistics on transfer pricing and DPT, covering the period up to the end of the 2018/19 tax year. On the same day, HMRC also announced that the introduction of the DPT had helped it to recover more than £5 billion in extra tax.

This £5 billion figure is attributable to:

  • settling over 60 investigations for additional Corporation Tax of over £2.2 billion;
  • securing almost £2 billion of VAT from businesses restructuring their operations as a result of DPT investigations or the introduction of DPT;
  • collecting £369 million from DPT charging notices (issued where HMRC believes businesses aren’t paying the right tax in other areas); and
  • securing another £480 million through DPT investigations in 2019/2020.

HMRC has stated that it is currently carrying out around 100 investigations into diverted profits arrangements by multinationals.

Notably, HMRC has increased the number of full time equivalent staff working on international tax risks by 76 to 441 during 2018/2019, a similar increase to the prior period from 2016/2017 to 2017/2018. Which, in the Sutton household, is probably equivalent to us re-reading 'French Children Don't Throw Food' and calling in my mother-in-law to help keep things under control.

So what are the changed behaviours that HMRC is trying to achieve? Put simply, it's discontinuing or avoiding 'contrived arrangements', adopting corporate structures and TP policies backed up by an appropriate level of analysis, and implementing them properly.

You can read the full text of the HMRC announcements here and here.

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Article by
Paul Sutton
LCN Legal Co-Founder

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