HMRC’s Push Against Overseas Profit Diversion Nets £70m

The taxman has been on a mission. Their target? Big multinational businesses. In particular, those that might be moving their profits overseas to reduce their UK tax bill. To give this some context, imagine you own a business that operates both in the UK and another country with lower tax rates. It might be tempting to ‘move’ your profits to the country where you’d pay less tax. This is what HMRC is trying to clamp down on.

In their arsenal is a tool called the ‘Profit Diversion Compliance Facility’. Launched in 2019, this initiative encourages multinationals to come forward if they’ve used tactics to divert their profits overseas. If they own up and work with HMRC, they might get more favourable penalty rates. Think of it as a chance for these businesses to make amends.

Why is This Such a Big Deal?

There are special tax rules about the pricing of goods and services between different parts of a multinational business. This is known as ‘transfer pricing’. If not handled properly, transfer pricing can lead to profits being wrongly reported in different countries.

In some cases, businesses try to use these rules to reduce their UK tax bill. How? By creating setups that have little to no genuine business activity (often just on paper) or by making it seem like they don’t have a taxable presence in the UK.

But HMRC’s not having any of it. They’ve got a higher tax rate (currently 31%) called the ‘diverted profits tax’. This is charged when they find evidence of such tactics.

The Results So Far

The numbers are telling a positive story for HMRC. They’ve collected over £70 million in the year up to March 2023. That’s a 3% jump from the £68 million they got in 2021-22 and a whopping 79% increase from the £39 million in 2020-21.

Sam Wardleworth, a tax expert, highlights that this approach by HMRC is working. Rather than enduring a long, costly tax investigation, many businesses are choosing to come forward and settle. Wait too long, and HMRC’s penalties can skyrocket. Proactivity, it seems, saves money and hassle.

However, for those who don’t come forward? HMRC’s ramping up its investigations. They’ve opened 147 new investigations in the last year, which is an 18% increase from the year before and 40% more than two years ago.

Looking Ahead

The world of tax, especially for big businesses, is complex. There are ongoing discussions about integrating the diverted profits tax into the regular corporation tax. New developments like the ‘multinational top-up tax’ are also being introduced. These all aim to ensure multinationals pay their due.

Wardleworth’s advice for businesses? Stay proactive. Identify and fix potential issues as they arise, rather than waiting for the taxman to come knocking.

In conclusion, it’s a delicate balancing act for HMRC. They need to collect the tax that’s due while ensuring businesses can thrive. This drive against profit diversion is a clear sign they’re committed to getting what’s rightfully owed, ensuring a fair playing field for all.