UK: HMRC suspects big businesses underpaid £35.8bn in tax last year.

As published on cityam.com, Monday 6 December, 2021.

The amount of tax that HMRC suspects big businesses have underpaid has risen by another £1bn in a year to £35.8bn, up from £34.8bn a year ago, according to data from a City law firm.

The figure includes £8.1bn in tax believed to have been avoided through ‘transfer pricing’ – the way multinationals allocate their costs and income between different countries, law frim Pinsent Masons told City A.M. this morning.

HMRC suspects that this practice results in some large businesses artificially reducing their tax liabilities in the UK. A multinational business could pay less Corporation Tax in the UK by charging an inflated price for services to its division in the UK.

Another £1.2bn is believed by HMRC to have been underpaid by large businesses due to ‘base erosion’ – the practice of businesses shifting profits from UK sales to lower-tax countries by claiming not to have a taxable presence in the UK.

Base erosion has been in the political spotlight over recent years, with the OECD announcing in October that 136 countries have signed up to a deal to enforce a minimum corporate tax rate of 15 per cent from 2023.

The deal will also allow countries to tax multinationals that make sales within their jurisdictions even if they do not have a physical presence there.

Another major contributor to the rise is suspected underpaid employment taxes, which have risen 49 per cent to £1.3bn in the past year from £900m the year before, the law firm pointed out.

HMRC is concerned that businesses are underpaying National Insurance by classifying employees as self-employed contractors.

April 2021 saw a major change in how the status of ‘off-payroll’ workers was assessed, with many more workers expected to be classified as employees rather than self-employed, potentially increasing the amount of tax owed.

Steven Porter, partner at Pinsent Masons, said that the amount of tax HMRC believes has been underpaid by the UK’s biggest businesses has now risen for six years in a row.

Porter told City A.M. this morning: “Multinationals underpaying tax is one of the biggest areas of concern for HMRC. The biggest businesses can expect to see HMRC continue to toughen its stance on it.”

“The Large Business Directorate is particularly effective at bringing in the underpaid tax it identifies. It prefers to do this through negotiation initially but it is certainly not afraid to move to large-scale investigations and litigation if it has to,” he added.

Porter pointed out that “from 2023 governments will have another tool to increase their tax take from multinational businesses when the new OECD rules come into force. That could see the suspected underpaid tax figure finally start to drop after rising for many years in a row.”