The UK tax authority has opened multiple criminal investigations after probing whether large companies are wrongly paying less UK tax as a result of their cross-border financial arrangements.
HM Revenue & Customs opened a criminal investigation in connection with transfer pricing, under which businesses allocate profits between different countries, in 2018, the body told the Financial Times — the first occasion since the introduction of tighter legislation on the area six years ago.
This has since grown to multiple live criminal investigations involving transfer-pricing disputes, HMRC added, although it declined to specify the exact number arguing this risked identifying the companies involved.
Transfer pricing refers to the amount charged when goods or services are sold between two companies in the same group, located in different countries. It can allow companies to legally minimise their tax liabilities by, for example, under or overpricing transactions or allocating profits to low tax jurisdictions.
However, under OECD rules companies are required to price transactions as if they occur between third parties and provide tax authorities with accurate evidence of how the price was determined.
“HMRC is investigating arrangements to divert profits to establish what is really happening in the UK and overseas,” a spokesperson said. “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.”
Potential abuses arising from transfer pricing include fraudulent arrangements and lying to the authority, as well as outright tax evasion.
Greater scrutiny on international groups’ tax arrangements comes on the back of a global outcry over multinationals moving profits to low-tax jurisdictions to minimise their bills and ongoing attempts to reform the international tax system.
The UK introduced a diverted profits tax in 2015 in an effort to tackle the issue. This is levied at 25 per cent, a higher rate than corporation tax — which is 19 per cent — to incentivise good behaviour.
HMRC added that only a “small percentage” of large businesses are being criminally investigated, but tax experts said it was highly unusual for the authority to open criminal investigations on corporate tax disputes.
“[HMRC] tend to shy away from prosecuting companies as you can’t put a company in jail,” said Jason Collins, head of tax at law firm Pinsent Masons.
John Cullinane, tax policy director at the Chartered Institute of Taxation, described the development as “quite a big deal”. HMRC generally takes the view that even if it disagrees with a company’s arrangements on transfer pricing, it is an “honest disagreement”, he said.
But Simon York, director of HMRC’s Fraud Investigation Service, said during a public webinar in November that they “currently have live investigations involving some very large corporates where individuals within those companies have lied to us in the context of a discussion”.
“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.”
HMRC, which is able to take civil or criminal action in relation to tax fraud, reserves the latter only for the most serious cases or where it will act as a deterrent to others. If sufficient evidence of fraud is found, the tax office can seek criminal charges but it declined to say if it had done so on any of the live cases.
George Turner, executive director of think-tank TaxWatch, said the tax office’s traditional approach of pursuing “transfer-pricing irregularities” as a civil issue was ineffective.
“Many tax avoidance schemes involve an element of fraud, and we believe that in those cases it would be far more effective for HMRC to pursue them as a criminal matter rather than as an avoidance dispute through the tax courts,” he said.