The rise in HMRC’s legal investigations marks the evolution of tax compliance.

The Financial Times reported that HMRC is currently launching several criminal investigations into transfer pricing disputes after opening its first case in 2018.

Transfer pricing refers to the necessary fees charged between different parts of a multinational company for goods, services or intangible assets, including intellectual property. Tax law provides that transactions between related parties should be taxed as if they were made on market terms.

However, HMRC believes that some multinational corporations make mistakes, take an overly aggressive position, or, more rarely, simply misrepresent internal transactions.

Figures released last November showed that HMRC’s estimated amount of tax underpaid through transfer pricing agreements and low capitalization had increased from £ 6 billion in 2019 to £ 10.4 billion. Thin capitalization refers to the use of interest payments from one part of one group of companies to another to reduce profits in the UK.

Tax expert Andrew Sackey of Pinsent Masons, the law firm behind Out-Law, said the news showed that HMRC’s strategic approach to tax compliance by UK’s largest corporations had evolved.

Sackey, who formerly led the Corporate Criminal Criminal investigation at HMRC’s Fraud Investigation Service (FIS), said FIS partnered with the Corporate Directorate in 2018 to establish the Profit Diversion Compliance Facility.

The Facility enables multinational companies with cross-border pricing agreements that may not be compatible with the Organization for Economic Cooperation and Development’s transfer pricing guidelines to work with HMRC to ensure transparency in better matching corporate tax payments with economic activity.

“This evolving and expanding suite of criminal interventions is clearly the next step in HMRC’s determination to regulate non-compliant transfer pricing practices or statements made in such negotiations,” said Sackey.

“This more aggressive stance makes it even more important for companies to review their earnings reporting and consider using the civil facility when appropriate. Most importantly, it is important that any document or representation sent to HMRC over an extended period of time is fully consistent, ”said Sackey.

According to the Financial Times, an HMRC spokesman said most of the transfer pricing investigations have been resolved by the agency, which has agreed to amend its agreements and pay additional corporate tax. However, the agency would consider initiating a criminal investigation if there were any signs of dishonesty.

Pinsent Masons’ tax expert Jason Collins said, “Most cases appear to involve a company representative misrepresenting the position when asked about company affairs. HMRC eschews corporate law enforcement as it needs to be able to remove dishonesty towards the company’s oldest employees. Where they fail to show such a conspiracy, these recent developments suggest that HMRC will focus its efforts on pursuing the dishonest person of the “lone wolf” instead.

“This shows that tax advisors in large corporations need to be careful about presenting facts to HMRC – to make sure they are accurate. If it doesn’t, HMRC will want to know if this was an honest mistake or something more sinister. Even if HMRC cannot prove it was a deliberate misstatement, the tax chief will exclude the company from severe penalties if the statement is made honestly but negligently, ”said Collins.

The HMRC figures show that the FIS filed 85 criminal charges and completed 675 civil law investigations in all areas of investigation in the 2019/20 financial year.