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Crackdown on transfer pricing

1 Dec 08

Companies may face high penalties for failing to take reasonable care

HM Revenue & Customs is cracking down on transfer pricing, the value put on assets, services, and funds transferred within an organisation.

A report in October from the House of Commons Public Accounts Committee shows the tax yield from transfer pricing enquiries increased from £118m in 2003/04 to £473m in 2006/07 and the signs are that HMRC wants this to rise significantly.

Large businesses in the UK should be prepared to see HMRC open a large number of enquiries and should consider taking steps including risk management discussions with their HMRC relationship managers; ensuring their transfer pricing policy has a clear business rationale and is adequately documented; and where necessary, implementing advance pricing agreements up front with the tax authorities.

If an HMRC enquiry on a UK group deems the pricing between companies to be “non-arm’s length”, a transfer pricing adjustment is made to the group’s tax return figures. HMRC then looks to recoup the additional tax, plus penalties of up to 100 per cent of the extra tax.

Such penalties have been imposed where HMRC considered there to have been fraud or negligence. Under rules for accounting periods starting on or after 1 April 2008, the bar has been lowered and “failure to take reasonable care” could result in a penalty. Businesses need to ensure that they are meeting transfer pricing requirements.

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