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HMRC's Enforcement Activities 'Increasingly Efficient'

by Robert Lee, Tax-News.com, London

16 January 2015


HM Revenue and Customs's (HMRC's) enforcement activities concerning large companies are now yielding GBP97 for every GBP1 spent by the UK Government, according to international law firm Pinsent Masons.

James Bullock, Head of Litigation and Compliance at Pinsent Masons, said: "The kind of returns that HMRC is getting on its increased investments into tax investigations would be seen as mouth-watering by the average private sector business. These numbers suggest that, for the foreseeable future, HMRC will be increasing investment in investigations as quickly as it can hire and train staff."

Data supplied to Pinsent Masons by HMRC shows that, in 2012-13, HMRC's large business service collected GBP87 for every GBP1 spent on staffing. This rose to GBP97 in 2013-14.

"Securing GBP5.9bn (USD8.96bn) in extra tax from investigations into large businesses, for expenditure on compliance staff of just GBP61m, means the Chancellor is getting tremendous value from these teams. It also suggests that additional funding for investigation will focus on investigations into medium-sized and larger businesses," Bullock said.

The revenue-to-staff cost ratio within HMRC's unit dealing with high-net-worth individuals (HNWIs) rose from GBP16 for every GBP1 spent in 2012-13 to GBP18 for every GBP1 spent in 2013-14. The same performance ratio was achieved by HMRC's local compliance unit in both years. In 2013-14, HMRC's HWNI unit investigations yielded GBP268m and its local compliance investigations yielded GBP8.9bn.

Both units have considerably increased efficiency over the last four years. In 2009-10, GBP14 was collected for every GBP1 spent by the local compliance unit, and only GBP6 gathered for every GBP1 spent by the HWNI unit.

Bullock did however warn of "another side to the story." He pointed out that while these figures are good news for HMRC and the UK Government, the increase in investigations and HMRC activity can lead to increased uncertainty for businesses. In particular, Bullock believes that a growing backlog of tax disputes "threatens to cause a real problem." The number of tax disputes waiting to be heard reached a record high of 27,246 this year. 267 new Upper Tribunal cases have been lodged in the last year, an increase of 32 percent on the previous year, and an almost fourfold increase on five years ago.

"The Treasury has been providing the funding for tax investigations, but it now needs to give political support to HMRC in dealing with the backlog. A long wait for a tribunal case to be heard is not as much of an issue for HMRC as it is for a taxpayer that has already had to pay the tax that is in dispute," Bullock concluded.

Adding additional uncertainty for large businesses, the UK intends to move forward with plans for a new Diverted Profits Tax (DPT), announced by Chancellor George Osborne in his Autumn Statement, with a consultation launched on draft legislation on December 10, 2014.

If passed in its current shape, the legislation would introduce a 25 percent DPT to counteract "artificial" tax arrangements that result in the erosion of the UK tax base. The Government aims to counteract arrangements that exploit permanent establishment rules and to prevent tax advantages from being obtained through the use of transactions or entities that lack economic substance, but the measure is expected to increase the compliance burden on the UK's largest businesses and multinational companies in particular.

TAGS: court | compliance | tax | investment | business | tax compliance | tax avoidance | law | United Kingdom | tax authority | legislation | transfer pricing | HM Revenue and Customs (HMRC) | revenue statistics | tax reform | HM Revenue and Customs (HMRC)

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