Statistical significance: HMRC’s TP and DPT figures for FY22

HMRC’s annual transfer pricing (TP) and Diverted Profits Tax (DPT) statistics are always eagerly awaited. They provide valuable insights into how HMRC are addressing transfer pricing compliance risks both domestically and internationally. The latest data, for the year ended 31 March 2022 (FY22) reveal that HMRC settled a record number of enquiries and resolved a record number of Mutual Agreement Procedure (MAP) cases. With the tax yield from both TP and DPT remaining strong, multinationals need to be aware of the likelihood of scrutiny and challenge over their related party transactions.

The TP compliance activity yield in FY22 was £1,482 million, down over 30 percent on the previous year (which was possibly an anomaly with some unusually large settlements), but still slightly above the £1,454 million reported for FY20. It is notable that the figures for TP yield include the impact of DPT on the settlement of transfer pricing enquiries (as companies may choose to agree TP adjustments, increasing their corporation tax, but averting a still higher DPT charge). Notwithstanding that, HMRC also collected a net amount of £198 million from DPT itself in FY22 (the highest reported since FY18) and £349 million over the last two years.

There are two clear messages from this:

• Firstly, TP compliance is still in sharp focus. New UK documentation rules and HMRC’s attention to the evidence supporting the assertions therein only reinforce the point; and
• Secondly, DPT remains a potent tool at HMRC’s disposal to tackle the perceived diversion of profits out of the UK, and it is still being very actively used.

HMRC’s TP enquiry activity has been extensive, considering both the number of cases settled (175 in FY22) and the average time taken to resolve them (34 months). By contrast, the duration of Profit Diversion Compliance Facility (PDCF) cases, averaging 16.5 months, demonstrates that the PDCF process can be a highly effective alternative for both parties. So does the fact that 96 percent of the final proposals made by taxpayers under the PDCF were accepted by HMRC. HMRC are investigating those registrants whose final proposals were rejected, as well as most multinationals that received nudge letters and chose not to register.

HMRC’s resolution of MAP cases in FY22 is a commendable step change, with almost double the number resolved compared to the average for the previous five years. Notably, this included resolution of MAP cases bilaterally with Germany and Italy respectively, traditionally two of the more difficult countries to have on the opposite side of the transaction. The number of new cases admitted to MAP remains high at 96, which is a positive indicator of trust in the process. Advance Pricing Agreements also remain in strong demand, though these understandably involve a significantly greater time investment from both businesses and the tax authorities involved.

The attached report by KPMG UK TP technical and dispute resolution specialists considers the HMRC figures and their implications in more detail. Overall, though, it is clear that multinationals can expect TP questions to remain at or near the top of their tax compliance agendas. The statistics are very significant.

For further information please contact:

• Phil Roper
• Nick Stevart