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FTSE 100 companies see rising tax enquiry costs

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The UK’s largest companies have reported a 33% rise between 2016 and 2017 in their costs for defending tax disputes, which may involve both HMRC and foreign tax authorities.

According to figures obtained by Thomson Reuters from the latest published annual reports of FTSE 100 companies, provisions made for tax disputes amounted to £3.6bn in 2017, up from £2.7bn in 2016.

The sectors most heavily impacted are pharmaceuticals, accounting for £1.5bn (42%) of total FTSE 100 tax litigation costs last year, and consumer goods companies, accounting for £1.3bn (36%). Many of these disputes relate to transfer pricing, although other tax disputes reported by companies included restructuring of subsidiaries in different jurisdictions.

HMRC’s own estimate of ‘tax under consideration’ as part of transfer pricing investigations rose from £3.8bn in 2015/16 to £5.8bn in 2016/17. This higher figure was accompanied by a drop in the number of HMRC investigations, leading Pinsent Masons to see a move towards fewer, but higher value disputes. Jason Collins, tax partner at Pinsent Masons, said: ‘Fewer transfer pricing inquiries launched last year reflects the fact that HMRC is taking on more complex and bigger ticket disputes, rather than taking a less aggressive approach.’

Pinsent Masons also sees another shift in HMRC’s focus away from foreign companies and towards targeting large UK companies, even as avenues for marketed tax avoidance are being closed down. While total ‘tax under consideration’ in relation to large foreign companies increased by 9% over the five years to 2017, reaching £8.4bn, the total amount related to large UK companies increased by 36% over the same period, from £12.1bn in 2012 to £16.4bn in 2017. UK businesses now account for 66% of all suspected underpaid tax, up from 61% in 2012.

‘As UK corporates have moved away from buying schemes, HMRC is taking a more aggressive stance in relation to more routine matters to ensure it gets paid what it believes it is owed,’ said Pinsent Masons partner Steven Porter.