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      HMRC’s approach to compliance activity has evolved significantly over the last decade with a much stronger focus on ‘upstream’ operational activities undertaken to promote compliance and prevent non-compliance before it occurs through a range of activities such as education, nudges and prompt campaigns.

      The latest example of this is a ‘One to Many’ educational campaign focused on UK holding companies claiming relief for ‘expenses of management’, which was launched by HMRC this week. Starting from 29 September 2025, letters are being sent to taxpayers and agents to raise awareness of common issues HMRC observe in this area.

      What are HMRC concerned about?

      There are some common areas of complexity when considering the tax treatment of a holding company. Underlying this campaign is a concern that holding companies simply treating their costs as deductible ‘expenses of management’ may not have given these areas the level of consideration HMRC expect from taxpayers in arriving at a filing position (on which, see our recent article).

      With HMRC actively recruiting more staff to support enquiry activity, the campaign indicates a likely increased focus from HMRC on how taxpayers are addressing these common areas of difficulty, which include:

      Phil Roper

      Partner, Global Transfer Pricing Services

      KPMG in the UK

      • The role of a typical holding company can make it challenging to distinguish between the activities of the company’s own business of holding investments and the activities it undertakes as part of a larger group. This difficulty can raise questions over the extent to which costs are properly dealt with for tax purposes under the ‘expenses of management’ regime (and hence whether the correct deductibility criteria are being applied) or, in some cases, over whether the costs are being recognised in the right entity at all;
      • Case law has made clear that not every expense incurred in the course of a holding company’s investment business is eligible for relief as an expense of the ‘management’ of that business, although the limits of relief can be difficult to identify. The Supreme Court has also recently upheld HMRC’s view that the restriction on relief for ‘capital’ expenditure further limits the pool of deductible costs; and
      • The ‘group role’ of a typical holding company can, in the absence of appropriate recharges, raise questions over whether the company has failed to recognise a service transaction in accordance with UK transfer pricing requirements, particularly with respect to overseas subsidiaries.

      The letters issued by HMRC recommend that taxpayers who identify inaccuracies in previously filed tax returns should either file amended returns, when within time to do so, or make a disclosure to HMRC (which may still be considered unprompted for penalty purposes). We expect that HMRC will adopt a tougher stance on penalties in cases where taxpayers have been issued the letter and have not subsequently re-assessed the treatment of management expenses in prior years.

      This is not the first upstream initiative that HMRC have launched which highlights compliance risks related to the boundary between management expenses and management services costs. Part 3 of HMRC’s ‘Guidelines for Compliance 7: Help with common risks in transfer pricing approaches’ signposts indicators of transfer pricing policy design risk. It specifically flags situations where the transfer pricing policy does not address roles that benefit other territories or entities, and where the transfer pricing policy is designed for service costs not to be charged to overseas affiliates to avoid legal restrictions on remittance or to mitigate local tax deductibility or withholding tax issues.

      Some of the areas which have attracted scrutiny in previous HMRC enquiries include restructuring costs, strategic planning and business development costs, corporate brand related costs, central IT costs and insurance. Recently we have seen large multinationals incurring significant expenditure on strategic initiatives relating to ESG and AI which may be future areas of focus.

      Damned if you do, damned if you don’t

      In practice there are genuine challenges here for taxpayers to navigate, both in terms of managing complex boundary issues and dealing with overseas tax administrations that aggressively challenge deductions for service fees. UK headed multinationals seeking to push central costs out to overseas subsidiaries often face extremely resource intensive audits due to onerous evidential requirements and, in some cases, the overseas tax administration seeks to apply domestic rules which may restrict taxpayers access to relief from economic double taxation under tax treaty Mutual Agreement Procedure (MAP) provisions.

      The OECD is seeking to tackle both these problems. It has recognised that improved and expanded guidance is needed in light of the extent of tax audits that relate to the application of the benefits test for intra-group services and is committed to undertaking a revision of Chapter VII of the Transfer Pricing Guidelines. We will be sharing our experience and recommendations with the OECD and Multinational Groups will also have the opportunity to engage with the OECD on this next year.

      The OECD is also working on a number of tax certainty initiatives, including updates to the ‘Manual on Effective Mutual Agreement Procedures’, which are seeking to protect taxpayers access to MAP.

      There are also challenges around what is proportionate, for example when trying to analyse how to allocate the time of C-Suite and other senior leaders between shareholder costs and management services. KPMG has developed tools that assist multinational groups with gathering this information in an efficient and robust way to ensure audit readiness, and we assist businesses in developing dispute prevention and resolution strategies for cross border intra-group services transactions.

      Don’t forget VAT!

      The VAT recoverability of management expenses and valuation of management services has been a hot topic for some time. Many holding companies have faced challenges from HMRC because they could not show a link between the VAT incurred and intended taxable supplies of management services. An agreement with the managed subsidiaries about what will be done and how much will be charged for it is always recommended.

      Wholly passive holding companies that just own shares as investments have no right of VAT recovery, not even if they are in a trading VAT group. The question of who receives a particular supply is also important as only the recipient has the right to claim VAT; that right does not rest with the payer where the payer is a different entity. Matters become more complex if there is the possibility that more than one entity receives and benefits from the same service and they all have a different VAT status.

      It is critical that the underlying logic and interpretation of the facts which supports VAT treatments can be reconciled with the rationale supporting the corporation tax treatment and transfer pricing policies.

      What next?

      We would recommend multinational groups with holding companies in the UK claiming in excess of £1 million in management expenses review the analysis available to support the corporation tax, transfer pricing and VAT treatment of those costs.

      We would also encourage groups that are disallowing in excess of £1 million in expenses in UK holding companies to consider reviewing the corporation tax and VAT treatment of those costs if a detailed review has not been undertaken previously.

      Finally, we would recommend groups review any people related costs which are being charged out without a mark-up, or which are excluded from the cost base for intra-group services (e.g. share based remuneration). We have seen a number of enquiries where the treatment of costs as pass-through or exceptional items is challenged by HMRC.

      KPMG support

      KPMG has significant experience in advising multinational groups in this area whether that be transfer pricing policy design, delivering audit readiness health-checks covering corporation tax, transfer pricing and VAT, managing tax audits in the UK or overseas, including multi-faceted enquiries conducted under HMRC’s High Risk Corporates Programme, or obtaining relief from double taxation via MAPs.

      If you have received a letter from HMRC and would like any assistance in reviewing historical management expense claims, or are interested in discussing any of the issues outlined in this article further, please reach out to your regular KPMG in the UK contact or one of the authors.

      For further information please contact:

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