Jessica Fino 25 Oct 2017 02:40pm

Large businesses underpaid £5.8bn in UK tax

HMRC has increased the number of challenges on large businesses last year, as it suspects £5.8bn was underpaid through transfer pricing

The Revenue believes the amount of tax unpaid by big businesses last year increased 51% since 2015/16, from £3.8bn to £5.8bn.

According to Pinsent Masons, this rise was driven by an increase in diverted profits tax (DPT) inquiries, used to prevent activities that divert profit away from the UK.

The law firm explained that transfer pricing relates to the pricing of a transaction when two companies that are part of the same multinational trade with each other. As these companies operate in different tax jurisdictions, the allocating of the profit is often a difficult process.

Of the £25bn in tax potentially underpaid by large firms last year, 23% is believed to come from transfer pricing issues.

Pinsent Masons warned that transfer pricing investigations are likely to lead to an increase in international tax disputes for multinationals, which are “complex and are notorious for often taking a very long time to resolve”.

The law firm found that transfer pricing enquiries that settled in 2016-17 took an average of 28.8 months to do so, up from 27.6 months in the previous year.

Ian Hyde, partner at the firm, said the diverted profits tax is being applied much more widely than was anticipated when the rules were first introduced in April 2015.

An HMRC spokesperson said, “Multinational companies must pay all taxes due and we don’t settle for less.

“Last year alone, we brought in an extra £8 billion for our vital public services by cracking down on large businesses that tried to avoid paying their fair share of tax. We do not comment on identifiable taxpayers."

Last month, HMRC revealed that the amount of yield from the DPT was £281m in 2016/17, up from £31m the previous year.

It also said that the application of both the transfer pricing and DPT legislation yielded £6.2bn over the last five years.