UK: Transfer pricing items in HMRC annual report and accounts, 2020 to 2021

HM Revenue & Customs (HMRC) published its annual report and accounts for the year ended 31 March 2021. 

Read the HMRC report

It’s safe to say 2020-2021 was an exceptional year for HMRC. The tax authorities were already busy dealing with major changes to customs to support the UK’s transition from the EU when the UK went into the first national lockdown on 23 March 2020 as a consequence of the COVID-19 pandemic. HMRC quickly became an integral part of the government’s response to the pandemic as authorities were tasked with launching major financial support schemes for individuals and businesses within a few weeks of the start of the first lockdown. Over 9,000 staff were redeployed to support customers using financial support schemes, and there were over 80 tax policy changes and clarifications to support customers and the economy during the pandemic. HMRC showed agility in the response during this critical period for the UK and the flexible approach taken towards taxpayers that were experiencing difficulties paying tax and filing returns on time.

It might be expected, given the pause on some compliance activities, redeployment of staff within HMRC and the economic impact of the pandemic on HMRC customers, that 2020-2021 tax revenues and other metrics reported by HMRC would be negatively impacted. However, the implication is not as severe as might have been expected.

Corporation tax compliance yield as a whole was up on FY 2019-2020 for both the Large Business Directorate (LBD), which rose by approximately 10%, and the Wealthy and Mid-Sized Business Compliance Directorate (Wealthy & Mid-Sized), which rose by almost 28%. This is significant given the disruption caused by the pandemic and the slowing in some compliance activity during 2020.

The corporation tax contribution to the overall compliance yield also rose sharply on FY 2019-2020 for both LBD (to approximately 33% from 20%) and Wealthy & Mid-Sized (to approximately 10.6% from 7%), suggesting other taxes were more impacted.

There were no separate statistics published on the transfer pricing element of the corporation tax compliance yield (still need to wait for the publication of HMRC’s FY 2020-2021 transfer pricing statistics). The data is expected to be published in the next few weeks and tax professionals are anticipating that there will be further details in here on HMRC’s Profit Diversion Compliance Facility (PDCF) which remains a hot topic.

There was some brief commentary on the PDCF in HMRC’s annual report which noted that during FY 2020-2021, a panel of HMRC senior tax specialists met to consider 23 disclosures under the PDCF. It was also noted that during the year, extra time was granted to a number of PDCF registrants to complete their disclosure reports due to the impact of the pandemic. This suggests that there were additional registrations not reflected in the 23 disclosures reviewed by the panel in FY2020-2021.

The material released with the annual report includes information for “tax under consideration” (TUC) which identifies the TUC for transfer pricing and thin capitalisation matters. As a reminder, TUC is a measure of HMRC’s work in progress and the data is based on a snapshot at 31 March 2021 which represents HMRC’s estimate of the maximum potential additional tax liability in each case—it is not actual tax owed or unpaid.

HMRC's annual report mentions that approximately 100 Diverted Profits Tax investigations into multinationals are currently underway, and the total amount of tax under consideration in these cases was £3.8 billion at the end of March 2021. This gives a clear indication that DPT is still viewed by HMRC as an important instrument for deterring and counteracting profit diversion and the recent legislative change announced in the budget as a swift response to the Vitol Aviation FTT decision is further evidence of this.  

The TUC for LBD customers relating to transfer pricing and thin capitalisation matters fell from £10.4 billion to £8.1 billion. Although this represents a significant reduction of over 20%, this is still a very large number and the largest single component of the LBD TUC (22% of the total).  There was also a downward movement in the overall international matters figure which was approximately 9% down on the previous year. Interestingly, the total TUC for LBD customers increased by 3% to £35.8 billion despite some slowing in HMRC compliance activity seen during 2020.

There are various reasons why the transfer pricing TUC may have fallen—for example, TUC can be impacted by the conclusion of large cases (the transfer pricing compliance yield has tended to be quite lumpy in the past for the same reasons). This makes it difficult to predict in which direction the TUC will move over the next few years, particularly given the impact of the pandemic on the profitability of large businesses will only start to show up in future statistics. What we do know is that a new uncertain tax treatment notification requirement is being introduced for large businesses from 1 April 2022 and there are likely to be changes in UK transfer pricing documentation requirements (currently under consultation) both of which are aimed at more targeted HMRC LBD transfer pricing enquiry activity.  So even if the TUC doesn’t increase, it is expected there might be a gap between compliance yield and TUC narrow.

It is interesting to contrast the TUC data for transfer pricing and thin capitalisation matters for Wealthy & Mid-Sized with the above data for LBD—the figure for Wealthy & Mid-Sized is much smaller at only £246 million, which is about 3% of the figure for LBD. There are around 2,000 large businesses looked after by the LBD, and there will be a significantly larger cohort of businesses that fall within Wealthy & Mid-Sized.  However, not all of these businesses will be operating internationally or have the same magnitude of international dealings as the largest businesses. But £246 million does still feel a surprisingly low number particularly given the overall (all taxes) compliance yield for Wealthy & Mid-Sized is over 55% of the LBD compliance yield. One of the changes proposed by HMRC as part of the UK transfer pricing documentation consultation was an International Dealings Schedule, which all taxpayers with international related-party transactions other than Small and Medium-Sized Enterprises (SMEs) would need to complete (according to the proposal). If this is introduced, it may lead to a growth in the Wealthy & Mid-Sized TUC for transfer pricing and thin capitalisation. Note that HMRC have recently undertaken another round of recruitment of international tax specialists to increase their resources, and some will sit within Wealthy & Mid-Sized.

A new development in the FY20/21 TUC statistics was the inclusion of additional data segmentation by industry sector—this is for all taxes so not specific to corporation tax (or transfer pricing), but is nevertheless still very interesting. The banking sector is the largest sector with a TUC of £8.5 billion and when insurance is added in the financial services sector makes up 30% of the total TUC. Pharmaceutical and healthcare was the second largest followed by retail.

UK parented groups continue to make up the majority of the LBD TUC (as expected), but it is perhaps surprising that the non-UK share is below 30%, which is similar to what it was for the prior year.  New this year was some further geographical analysis of the TUC (by recorded location of the parent of the group) with data for individual countries included for the first time. While it was no surprise seeing the United States top the list of overseas territories (£5.4 billion TUC), it is striking how far it is ahead of the rest of the pack, with Switzerland the next largest at £0.8 billion.

It is going to be interesting to see what impact changing trade patterns post Brexit, the BEPS 2.0 overhaul of the international tax system, the introduction of an uncertain tax treatment notification requirement, and potential changes in UK transfer pricing documentation requirements will have on this data over the next five years.  Tax professionals believe transfer pricing will remain at the forefront of HMRC’s compliance activity, and it is evident that HMRC is focused on improving the effectiveness of enquiries into transfer pricing. In the meantime, publication of HMRC’s FY 2020-2021 transfer pricing statistics is expected next.

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in the UK:

Philip Roper | +44 7917 603344 | Phil.Roper@kpmg.co.uk