The UK’s HMRC on 28 April 2022 published transfer pricing and diverted profits tax (DPT) statistics for 2020-2021, which include information on additional taxation, duration of engagements and the number of open/settled engagements with taxpayers. The data clearly indicate a trend toward increased compliance activity, with more engagements resulting in longer resolution times and higher tax yields.
HMRC continue to view transfer pricing as a key area of focus and are devoting considerable resources as part of their “resource to risk” compliance policy. Transfer pricing enquiries have resulted in the highest-ever yields for HMRC, increasing sharply to pass GBP 2 billion for the first time. While this is in part a result in changes in the way HMRC report transfer pricing yields, the marked increase in yield from a similar number of settled enquiries points to increased complexity of underlying issues. This further complexity has had an effect on the average time to settle, which increased to 36 months.
The number of applications for both advance pricing agreements (APAs) and advance thin capitalisation agreements (ATCAs) has decreased compared to the previous period. While the ATCA programme continues to be impacted by the adoption of the Corporate Interest Restriction rules in 2017, interest in the APA programme is tempered by the length of the process, which has seen average resolution times climb to an unprecedented 55.5 months. The amount of time needed to reach agreement brings into question the viability of new applications and has contributed to a record 11 applications being withdrawn. On the other hand, the number of MAP applications has risen by close to 50% year-on-year. This increase is consistent with a rapid uptick in audit activity across the region and globally, and has also had an impact on the average time to resolve a case, which has increased to 34 months.
The statistics regarding DPT follow the outlined trend of more complexity and value, manifested in considerable increase in both the yield from DPT directly but especially in the additional tax resulting from transfer pricing settlements, which more than doubled year-on-year to approximately GBP 1.4 billion.
HMRC’s latest statistical data provide the first, more detailed insight into the running of the Profit Diversion Compliance Facility (PDCF) since the launch of the compliance facility in 2019. The year has seen 22 resolved cases with an average resolution time of 12 months from the registration meeting. According to the data, 96% of the resolved cases saw HMRC accept the final proposal, resulting in GBP 305 million in additional tax revenue. While it is still early days, it seems that the PDCF has been a success for HMRC. Putting the process in the broader context of dispute resolution options available, PDCF represents a faster route to resolution, with a taxpayer-led investigation against a pre-defined framework.
The published yields resulting from transfer pricing and DPT enquiries make it clear that these areas of tax will remain a key focus for HMRC, particularly in the context of needing to replenish public funds. It is also clear that dealing with the increased complexity of issues raised in enquiries can present significant challenges for taxpayers, both in terms of time and resources.
Looking ahead, draft legislation is expected as a result of the recent consultation on transfer pricing documentation requirements in the UK, which points to a continued focus on compliance. In this context, taxpayers will be increasingly well served by robustly evidenced and regularly maintained transfer pricing policies.
Paul Daly
paul.daly@bdo.co.uk