FTSE 100 companies have assigned a total of £2.69bn to cover the cost of tax litigation last year, 61% more than in 2015 (£1.66bn).
According to Thomson Reuters, the company that compiled the figures, this increase was driven by the pressure on tax authorities to increase tax revenues and tackle tax avoidance, particularly among large, high profile businesses.
As well as the direct costs of tax litigation, companies are covering themselves against other possible major costs, such as lost revenue and a lower share price, as a result of reputational and brand damage caused by negative publicity.
Raichel Hopkinson, head of practical law dispute resolution at Thomson Reuters, said, “UK corporates are braced for some major legal wrangles with tax authorities and with each case potentially worth millions of pounds, the stakes for both sides are very high.
“As the FTSE100’s global operations become more far-reaching, intricate and diversified, the risk of becoming embroiled in a tax dispute is magnified.”
Pharmaceutical companies set aside the most for tax disputes, with a total saved up of £1.72bn - 64% of the total put aside by the 100 biggest companies.
“Tax authorities have long seen pharmaceutical companies’ tax arrangements as an area of contention, as the amounts of disputed tax involved in transfer pricing can be substantial,” Hopkinson explained.
Thomson Reuters said that HMRC has been improving its methods of identifying companies it suspects of underpaying tax. The tax authority is now able to collect and cross-reference more information from other government databases and external sources such as foreign tax authorities and banks thanks to its “Connect” database.
Last month, HMRC revealed that, of the 26 cases where HMRC considered tax avoidance was involved in 2016/17, 22 were won by the Revenue, three were lost and one had a mixed result.
HMRC generated a record compliance yield of £28.9bn last year as a result of its anti tax avoidance and evasion campaign. This is the equivalent of around a quarter of the UK’s NHS budget, the Revenue said.