HMRC showing no III effects from the pandemic: What the latest transfer pricing statistics reveal
A summary of key messages from HMRC’s transfer pricing and diverted profits tax statistics released for the period April 2020 to March 2021 (2020/2021).
Her Majesty’s Revenue and Customs (HMRC) have published the most recent transfer pricing and Diverted Profits Tax (DPT) statistics for the period April 2020 to March 2021 (2020/2021). The statistics report transfer pricing and DPT yields, case volumes and length of time to resolve cases across a variety of transfer pricing cases, including enquiries, Advance Pricing Agreements (APAs), Mutual Agreement Procedures (MAPs), Advance Thin Capitalisation Agreements (ATCAs), DPT investigations and Profit Diversion Compliance Facility cases (PDCFs).
The 2020/2021 tax year is the first year to reveal the impact that the COVID-19 pandemic had on HMRC’s operations.
The pandemic was no obstacle to record transfer pricing yields
The statistics reveal a nearly 50% jump in transfer pricing yields, from GBP1.454 billion in 2019/2020 to GBP2.162 billion in 2020/2021. While in the early stages of the pandemic HMRC acted appropriately to pause cases where taxpayers were significantly affected by furloughs or other challenging business conditions, it is clear that most cases proceeded as usual.
The increase in yield is partially attributable to the success of the PDCF programme, as a material number of settlements were achieved during 2020/2021. Additionally, it is likely that HMRC’s increased use of discovery assessments made for years outside the normal enquiry window have maximised yields across all of their cases. DPT yield, although comparatively a much smaller number, also recorded a massive jump; however, this increase may be more reflective of timing issues given the calculation is made on a net basis and DPT enquiries now have a 15-month window to resolve.
Cases took a longer time to close
While we may have expected fewer cases to close on longer timelines during the pandemic, in most instances, business appears to have proceeded as normal, with similar volumes of cases closed with only an average 3- to 4-month delay. The notable exception to this is with the time to close MAP cases, which increased by an average of nearly 12 months.
The longer timelines certainly reflect some redeployment of HMRC personnel to more critical initiatives, such as the Coronavirus Job Retention Scheme. However, longer timelines may also be attributable to efforts to close long-running cases, which has been one of HMRC’s goals in recent years.
PDCF is an unqualified success
Since the first nudge letters were issued in early 2019, HMRC has considered the PDCF programme to be a success. Over the past three years, 135 nudge letters were sent to taxpayers, with nearly two-thirds registering for the facility. The average of 12 months from post-registration meeting to settlement acceptance far surpasses the timeline of any other HMRC programme. The tax yielded by the programme since its inception is GBP305 million, and DLA Piper is aware of several cases which were settled with no adjustment.
With a 96% proposal acceptance rate and a more advantageous penalty treatment, the PDCF is an attractive option for any taxpayer anticipating a dispute over past transfer pricing arrangements. Registration can be made by any taxpayer who would like to make a settlement even in the absence of a nudge letter prompting them to do so.
Taxpayers prefer MAP to APA
HMRC’s APA programme is still lagging behind in terms of attractiveness to taxpayers, as indicated by low levels of applications and cases closed, and comparatively high numbers of applications withdrawn and turned down. With an average of over 4.5 years to close, MAP is seen as a better option, as the time to resolve is under three years. A 60% increase in MAP applications shows that this programme enjoys a good reputation with taxpayers and their advisors.
However, we believe the APA programme remains a good strategic option for multinationals with complex transactions that are likely to give rise to double taxation.
Key takeaways
HMRC's publication of transfer pricing and DPT data for 2020/2021 clearly shows a renewed commitment to increasing activity and revenue collection from multinational groups in these areas across the board. This is in line with our view, and that of companies, that managing transfer pricing across a group – from working with the business, transfer pricing policy design and compliance, to tax audit defence and risk management – must be a priority for tax functions in multinational groups with presence in the UK.
We have previously commented on the role we believe a well-thought-through APA and MAP strategy has in a multinational. APA and MAP are both tools at the disposal of multinational groups that up to now have been largely under-utilized. We would now add PDCF as another option for taxpayers to proactively address expected controversy for positions taken in prior years. While the PDCF offers settlement on a unilateral basis, MAP access is still available upon conclusion of the PDCF process.
Our updated guide on APA and MAP in over 40 countries can be accessed here.
Contact the author or your usual DLA Piper advisor if you need further information.
