HMRC has published its latest statistics on transfer pricing and diverted profits tax (DPT), covering 2023-24.
The statistics show the continuing importance of this area to HMRC, with the yield from enquiries up 9% from the previous year to GBP 1.8 billion (although still short of the one-off bumper take in 2020/21).
HMRC’s latest statistics cover advance pricing agreements (APAs), advance thin capitalisation agreements (ATCAs), and transfer pricing mutual agreement procedures (MAP), as well as transfer pricing enquiries.
Under the current DPT rules, companies must notify HMRC if they have arrangements that potentially fall within the scope of the DPT legislation, subject to limited statutory exceptions. Moreover, if HMRC has reason to believe that DPT is due, it will issue a preliminary notice. Depending on the company’s response, HMRC may then issue a charging notice requiring the company to pay DPT within 30 days. These rules may see significant changes after further consultation this spring.
In 2023/24, fewer notifications were filed by taxpayers (16) and charging notices from HMRC were issued to “less than 5” groups, perhaps showing that the objective to discourage affected structures may have been met.
The total yield from DPT action has continued to fall, down to GBP 225 million, which is less than 10% of the first-year impact. A higher proportion of the yield was from DPT itself rather than from associated transfer pricing adjustments. The statistics show a consistent level of staffing from HMRC in this area, which may feed into the mixed report for activity, with an uptick in agreements with taxpayers matched by a reduction in completed enquiries (although there is no statistic for open/ongoing enquiries).
The number of enquiries settled in 2023/24 was 128, a decrease from 153 in the previous year and now back to being broadly in line with the 2018-2021 totals. The average time to complete these enquiries also dropped down to earlier levels, at slightly under three years.
Given the publication this year of the transfer pricing Guidelines for Compliance (GfC), we anticipate there could be a significant change in the enquiry statistics over the coming years. On the one hand, there is a possibility of a significant uptick in queries from non-specialist inspectors more empowered to raise questions and request taxpayers’ transfer pricing documentation. On the other hand, it is possible that many of those instances could be dealt with quickly, or not pass risk assessment tests to progress into a full-blown enquiry, especially when clients have made an effort to address risk areas highlighted by the GfC. The outcome may depend on HMRC’s resourcing levels and strategic aims.
APAs, in contrast to enquiries, saw a jump in the number of cases concluded to 27, almost twice the number for the previous year and the highest since 2018/19. These cases remain relatively slow, with an average of 53 months to conclude, a similar length of time as the agreements will typically cover. A notable factor is that in the last three reported periods there have been more applications made than cases resolved (including both agreements and withdrawn applications), with the net increase in open cases being +18, +20, and +16 respectively, suggesting an increasing caseload building up.
An area where HMRC is rightly proud of its results is in relation to MAP settlements, which averaged 29 months to completion for all cases and 25 months for transfer pricing cases specifically. In addition to beating the statistics for enquiries and APAs, this result stands well against the international average time to complete a transfer pricing MAP case of 32 months. Furthermore, the 86 cases settled in 2023/24 slightly exceeded the number of new case admissions, indicating this may be a sustainable position. The most active counterparties for the UK in MAP negotiations are Germany and Italy according to OECD statistics, with Italy being involved in a large number of MAP proceedings generally.
Applications for ATCAs remain at very low levels, reflecting shifts in industry practice whereby private equity deals are now generally content to rely on supporting reports rather than needing formal certainty on thin cap positions. This is also an expected impact of the introduction of the Corporate Interest Restriction (CIR) rules, which in combination with higher base rates reduce the practical tax sensitivity of transfer pricing in many instances. There was a slight uptick in the number of agreements reached to 10, with the average time taken to reach agreement falling to slightly over three years, but a continuing decline in the number of agreements in force to 27.
The Profit Diversion Compliance Facility (PDCF) remained a useful tool for HMRC, which noted that the PDCF has proved successful, with about two-thirds of large businesses targeted deciding to use the facility, and a veiled warning that HMRC may “focus even more resources on those which avoid paying tax.”
While 2022/23 saw a slowdown in the number of PDCF letters issued by HMRC, allowing the caseload to ease, 2023/24 saw a resurgence of HMRC activity, with 19 PDCF letters issued and 10 registrations. This still reflects a longer-term downward trend in activity, likely because those with the highest risk profiles have already been approached. We potentially may see future declines in PDCF activity, allowing for resources to be focused on enquiries and APAs, or perhaps an increase in follow-ups with those taxpayers previously engaged with the process.
Overall, the 2023/2024 statistics confirm the importance of transfer pricing to HMRC’s tax yields, as well as strong levels of international work between tax authorities. We expect to be in interesting times, with both higher-quality compliance expected of groups and a likely increase in inspectors’ freedom to investigate using the Guidelines for Compliance, before even taking into account the implications of Pillars One and Two, and public country-by-country reporting requirements on multinationals’ tax workload.
Andrew Stewart
BDO in United Kingdom
The statistics show the continuing importance of this area to HMRC, with the yield from enquiries up 9% from the previous year to GBP 1.8 billion (although still short of the one-off bumper take in 2020/21).
HMRC’s latest statistics cover advance pricing agreements (APAs), advance thin capitalisation agreements (ATCAs), and transfer pricing mutual agreement procedures (MAP), as well as transfer pricing enquiries.
Diverted Profits Tax
Under the current DPT rules, companies must notify HMRC if they have arrangements that potentially fall within the scope of the DPT legislation, subject to limited statutory exceptions. Moreover, if HMRC has reason to believe that DPT is due, it will issue a preliminary notice. Depending on the company’s response, HMRC may then issue a charging notice requiring the company to pay DPT within 30 days. These rules may see significant changes after further consultation this spring.In 2023/24, fewer notifications were filed by taxpayers (16) and charging notices from HMRC were issued to “less than 5” groups, perhaps showing that the objective to discourage affected structures may have been met.
The total yield from DPT action has continued to fall, down to GBP 225 million, which is less than 10% of the first-year impact. A higher proportion of the yield was from DPT itself rather than from associated transfer pricing adjustments. The statistics show a consistent level of staffing from HMRC in this area, which may feed into the mixed report for activity, with an uptick in agreements with taxpayers matched by a reduction in completed enquiries (although there is no statistic for open/ongoing enquiries).
Enquiries
The number of enquiries settled in 2023/24 was 128, a decrease from 153 in the previous year and now back to being broadly in line with the 2018-2021 totals. The average time to complete these enquiries also dropped down to earlier levels, at slightly under three years. Given the publication this year of the transfer pricing Guidelines for Compliance (GfC), we anticipate there could be a significant change in the enquiry statistics over the coming years. On the one hand, there is a possibility of a significant uptick in queries from non-specialist inspectors more empowered to raise questions and request taxpayers’ transfer pricing documentation. On the other hand, it is possible that many of those instances could be dealt with quickly, or not pass risk assessment tests to progress into a full-blown enquiry, especially when clients have made an effort to address risk areas highlighted by the GfC. The outcome may depend on HMRC’s resourcing levels and strategic aims.
APAs
APAs, in contrast to enquiries, saw a jump in the number of cases concluded to 27, almost twice the number for the previous year and the highest since 2018/19. These cases remain relatively slow, with an average of 53 months to conclude, a similar length of time as the agreements will typically cover. A notable factor is that in the last three reported periods there have been more applications made than cases resolved (including both agreements and withdrawn applications), with the net increase in open cases being +18, +20, and +16 respectively, suggesting an increasing caseload building up.
MAP
An area where HMRC is rightly proud of its results is in relation to MAP settlements, which averaged 29 months to completion for all cases and 25 months for transfer pricing cases specifically. In addition to beating the statistics for enquiries and APAs, this result stands well against the international average time to complete a transfer pricing MAP case of 32 months. Furthermore, the 86 cases settled in 2023/24 slightly exceeded the number of new case admissions, indicating this may be a sustainable position. The most active counterparties for the UK in MAP negotiations are Germany and Italy according to OECD statistics, with Italy being involved in a large number of MAP proceedings generally.
ATCAs
Applications for ATCAs remain at very low levels, reflecting shifts in industry practice whereby private equity deals are now generally content to rely on supporting reports rather than needing formal certainty on thin cap positions. This is also an expected impact of the introduction of the Corporate Interest Restriction (CIR) rules, which in combination with higher base rates reduce the practical tax sensitivity of transfer pricing in many instances. There was a slight uptick in the number of agreements reached to 10, with the average time taken to reach agreement falling to slightly over three years, but a continuing decline in the number of agreements in force to 27.
Profit Diversion Compliance Facility
The Profit Diversion Compliance Facility (PDCF) remained a useful tool for HMRC, which noted that the PDCF has proved successful, with about two-thirds of large businesses targeted deciding to use the facility, and a veiled warning that HMRC may “focus even more resources on those which avoid paying tax.” While 2022/23 saw a slowdown in the number of PDCF letters issued by HMRC, allowing the caseload to ease, 2023/24 saw a resurgence of HMRC activity, with 19 PDCF letters issued and 10 registrations. This still reflects a longer-term downward trend in activity, likely because those with the highest risk profiles have already been approached. We potentially may see future declines in PDCF activity, allowing for resources to be focused on enquiries and APAs, or perhaps an increase in follow-ups with those taxpayers previously engaged with the process.
Overall, the 2023/2024 statistics confirm the importance of transfer pricing to HMRC’s tax yields, as well as strong levels of international work between tax authorities. We expect to be in interesting times, with both higher-quality compliance expected of groups and a likely increase in inspectors’ freedom to investigate using the Guidelines for Compliance, before even taking into account the implications of Pillars One and Two, and public country-by-country reporting requirements on multinationals’ tax workload.
Andrew Stewart
BDO in United Kingdom