On 28 April 2022 HMRC published the latest set of statistics relating to transfer pricing and the diverted profits tax. The latest release contains data up to end of the 2020/21 tax year.

HMRC is anxious to reduce the amount of the tax gap, defined as the difference between the tax that should, in theory, be paid and the tax that is actually paid. The corporation tax gap was estimated at GBP 5.7 billion for 2019/20, the latest year for which the tax gap was measured. The transfer pricing work is an important part of HMRC’s strategy to ensure that companies pay the right amount of tax.

Monitoring of the costs and benefits of transfer pricing work is important for determining the effectiveness of the current approach and making decisions on any policy changes required.

Transfer pricing yield

The transfer pricing yield is the measure of the additional tax revenue collected as a result of transfer pricing enquiries; transfer pricing-related advance pricing agreements (APAs); advance thin capitalisation agreements (ATCAs); and mutual agreement procedures (MAPs). The transfer pricing yield for 2020/21 was GBP 2.162 billion.

In 2020/21 a total of 124 transfer pricing enquiry cases were settled and the average time required to settle an enquiry was 36 months.

Staffing

In 2020/2021 there were 431 full-time equivalent staff working on international issues involving multinationals, such as transfer pricing, diverted profits tax, controlled foreign companies and cross-border debt. HMRC devotes significant time to training staff on international tax issues.

Advance pricing agreements

In 2020/21 HMRC agreed 24 transfer pricing-related advance pricing agreements (APAs). The average time to reach an agreement was 55.5 months. As the UK works with the tax administrations of other countries to conclude bilateral or multilateral APAs, considerable time may be spent in negotiation with treaty partners, and this extends the time required to reach an agreement.

Advance thin capitalisation agreements

An advance thin capitalisation agreement (ATCA) is an agreement between a business and HMRC outlining how the transfer pricing rules apply to funding issues, and determining the appropriate amounts, terms and conditions of related party debt financing. In 2020/21 HMRC agreed 23 ATCAs and the average time required to reach an ATCA was 28.1 months. There were 97 ATCAs in force during the year.

Mutual agreement procedure

A total of 62 transfer pricing related mutual agreement procedure (MAP) cases were resolved in 2020/21 and the average time to resolve a case was 34.4 months. During the year 128 new transfer pricing MAP cases were accepted.

Diverted profits tax

The diverted profits tax (DPT) aims to discourage businesses from diverting profits abroad through complex business structures; and applies at a rate of 25% to diverted profits of UK and multinational companies. The tax applies to certain artificial arrangements that divert profits from the UK, such as arrangements to avoid creating a permanent establishment; or to arrangements without economic substance that exploit tax mismatches.

The yield from the diverted profits tax in 2020/21 was GBP 151 million. HMRC considers that the additional tax collected as a result of the DPT is in reality higher than that shown in the statistics as taxpayers change their behaviour to pay the correct corporation tax instead of becoming liable to the DPT.

Companies must notify HMRC of arrangements that may be within the scope of the DPT. In 2020/21 a total of 25 DPT notifications were received, although not all notifications led to a charge to DPT.

If HMRC considers that DPT is due, a preliminary notice is issued. After considering the taxpayer’s response HMRC may then issue a charging notice requiring DPT to be paid within 30 days. In 2020/21 HMRC issued a total of 78 DPT preliminary notices to 27 taxpayer groups and issued 59 DPT charging notices to 23 groups.