HMRC transfer price probe

HMRC has increased its focus on companies suspected of using transfer pricing to avoid paying UK taxes.

According to a Freedom of Information request from law firm, Pinsent Masons, HMRC is investigating £1bn of tax linked to transfer pricing issues, up by 47% from last year's figure of £680m.

Heather Self, a Pinsent Masons partner, said: ‘There has been a lot of public discussion around companies’ UK tax bills, and these figures show that HMRC has been taking an increased interest in where multinationals with UK operations pay their taxes.

‘With increased pressure from the government to bring in more revenue, and more resources to investigate potential avoidance and evasion, HMRC has been investigating more and more tax payments. This doesn’t necessarily mean there is more avoidance or evasion taking place, but that HMRC is being more thorough with its investigations.

‘HMRC will investigate a company where it thinks it has crossed a line on transfer pricing, and HMRC will demand extra taxes from companies that do have a genuine case to answer.’

Transfer pricing is a practice which multinationals such as Amazon, Starbucks and Google have recently come under fire for, since it allows them to restructure and shift profits into lower-tax jurisdictions, escaping higher penalties in countries from which their profits are effectively derived.

Pinsent Masons dubbed the calls for law changes to prevent ‘abusive’ transfer pricing as a knee-jerk reaction.

Self said: ‘The UK has to accept that it cannot change the law on transfer pricing or the taxation of revenues unilaterally. There is already a tax on turnover in the UK and it’s called VAT. EU law does not allow the UK to create new turnover taxes.

‘Rules on transfer pricing are set by the Organisation for Economic Co-operation and Development (OECD), and while they could do with some reform, that process is actually already under way.’

She warned that the contraction of the commercial lending market will also have boosted HMRC’s transfer pricing investigations

CPS to target middle classes

The Crown Prosecution Service (CPS) will join forces with HMRC in a bid to crack down on the promotion of aggressive tax avoidance schemes and the professionals who invest in them.

That’s the message from the CPS which is set to increase by fivefold the number of tax evasion cases it takes on to 1,500 by 2015, according to Keir Starmer, the director of public prosecutions.

In an interview with the FT, the CPS chief said “it is intended that we will select cases to send a clear message as to the breadth of our coverage”. The CPS secured some 200 tax convictions in 2010, with an 86% success rate.

Starmer’s announcement echoes a greater governmental and societal push to track down and punish legal tax evasion by corporates such as Facebook, Starbucks and Google as well as TV celebrities like Jimmy Carr.

He will formally outline the new CPS approach on Tuesday 22 January and stresses that tax evasion is far from a victimless crime, and actually costs every UK household over £500 a year.

In his speech, to be given tomorrow evening, Starmer is set to say: ‘Tax evasion has to be dealt with robustly all the time. But in a recession, when ordinary law-abiding tax payers are suffering real hardship, the need to deter, detect and prosecute those who evade tax is greater than ever.

‘There is a longstanding myth that unlike many other offences that the Crown Prosecution Service has to deal with, tax evasion is a victimless crime. But many would be outraged if money was stolen from their personal bank accounts. So let us work out the cost to every family and every adult in the UK of tax evasion.

‘The latest estimate by HMRC suggests that tax evasion costs the UK economy £14bn a year. That is the equivalent of £530 from every household, or £ 769 per family. A victimless crime? This is money that could have been spent on schools, hospitals, fire-fighters, police and public services.’

The CPS says the new attack on tax evasion is possible due to the strengthened fraud prosecution capability following its merger with the Revenue and Customs Prosecutions Office.

It also points to the fact that “senior judges have made it clear that when it comes to large-scale tax evasion, even those without previous convictions can expect significant custodial sentences".

The assault on middle class tax evaders marks the latest ‘get tough’ strategy by the authorities as they continue to probe over £1bn of UK taxes that may have been avoided by the transferring pricing tactics employed by multinationals.

Audit reform

Auditors will have to wait until at least June before learning whether Europe will give the green light on radical proposals to shake up the profession.

As members of the European parliament’s legal affairs committee (JURI) continued to argue over measures such as compulsory auditor rotation and joint audits, the full European parliament is now not expected to vote on the matter until 10 June, it has emerged.

The parliament was originally expected to vote on the proposals next month (February). JURI had been due to vote on amendments to the proposals next week (22 January) but this has also been postponed.

A spokesman for Sajjad Karim, the MEP who is guiding the proposals through the committee, confirmed the postponement, but added that a revised timetable had not been finalised.

News of the delay comes as the UK’s Competition Commission prepares to deliver its provisional verdict on the large company audit market. The investigation began after a referral from the Office of Fair Trading (OFT) in October 2011 and the Commission has until October this year to produce final recommendations. The initial report is expected to be released towards the end of this month (January).

Director in fraud

Manchester Crown Court has sentenced a director of a sub-prime loan company to seven-and-a-half years in prison in his absence, after he fled the jurisdiction before the trial.

Waheed Luqman, who was found guilty of fraud and false accounting, was given seven-and-a-half years for conspiracy to defraud and four-and-a-half years for each of the two counts of conspiracy to falsely account. All three sentences are concurrent.

He was also disqualified from acting as a company director for 15 years and has been ordered to pay costs to the SFO of £250,000.

The 39-year-old was a director of Lexi Holdings, a property finance company based in Manchester and at some time with a London office. The company went into administration in 2006 with debts of over £100m.

According to the Serious Fraud Office, he conspired with other members of the Luqman family, principally his brother Shaid, to defraud creditors, which included the company’s main lender, Barclays Bank, between 2000 and 2006. The business, initially named Pearl Holdings (Europe) Limited, was established by Shaid Luqman in 2000 with funding from Barclays Bank. Renamed Lexi Holdings in 2004, it provided finance to individuals and companies wanting to invest in property.

Loans, commonly known as ‘bridging loans’ were facilitated through Lexi Holdings at short notice to secure a property, bridging a gap until the borrower could acquire long-term finance.

The events took place over a period when property prices and financial markets were more buoyant than they currently are and when banks were more ready to lend.

Banks, mostly Barclays, provided Lexi Holdings with large amounts of capital over the period on the basis that the business was a highly regarded and successful enterprise making loans available to property developers who might not be able to obtain loans immediately from the banks. Lexi entered into a Revolving Credit Facility Agreement with Barclays to draw down the required amounts for each transaction and though the bank carried out checks on the running of the agreement, there was a great deal of trust involved, the SFO said in a statement.

Monies obtained by Lexi under the agreement were diverted and recycled through various bank accounts held in different names and trading entities which were hidden from the auditors and from Barclays and later a syndicate of banks of which Barclays was the senior partner.

They were also hidden from Lexi’s own internal accountants as the hidden accounts were controlled by a closed circle. The company’s accounts were also doctored to create a false picture of the company’s profitability and creditworthiness.

Money was drained out of the company to family members in Pakistan and included large sums to the brothers’ father, Mohammed Luqman.

Waheed Luqman was tried in absentia following abscondment when charges were brought in August 2011. He is thought to be in Pakistan.

He was also found guilty of one common law charge of conspiracy to defraud creditors of Pearl Holdings (Europe) Ltd, later known as Lexi Holdings and two charges of conspiracy to falsely account.

His brother, Shaid Luqman, the main perpetrator of the fraud, fled the jurisdiction in June 2011 before he could be charged and is also believed to be in Pakistan.

An alleged accomplice, charged with money laundering offences, was acquitted.

Bank account HMRC

From April 2013 employers will make their payments to the HMRC Accounts Office Cumbernauld bank account.

Employers who make a payment to HMRC by:

•Bacs Direct Credit

•Faster Payments by online/telephone banking

•CHAPS

will make their payments to a single bank account from April 2013. From month 01 of the 2013-14 tax year payments should be made to the Accounts Office Cumbernauld account.

HMRC has started to send employers information about this change ready for 2013-14.

Further details are available from HMRC.

RTI

The pending introduction of Real Time Information will transform PAYE and with only three months to go, HMRC is working hard to generate interest and ensure that employers are ready for the most radical change to employee taxation admin for 70 years. So forget the demanding new administrative burden and test your knowledge on the PAYE system. There may even be a few items on the taxman’s list you never knew about PAYE.

Back in 1944 only 15m people were registered for PAYE; today, over 30m have the pleasure of being taxed at source.

The person who piloted PAYE – Sir Kingsley Wood – died unexpectedly on the day it was due to be announced to parliament. Let’s hope the same does not befall the inventor of RTI.

Back in the 1970s employers actually had to physically attach National Insurance stamps to a card, but the whole system was modernised in 1975 when NI was incorporated into PAYE

Not to state the obvious, but the world of work has changed beyond recognition. Who would even want to stay with the same employer for life these days? As HMRC helpfully points out, ‘when PAYE came in most people remained with the same employer they started working with for most of their working lives. Today people move jobs and change employers much more frequently’.

Every year HMRC receives incorrect or incomplete information from employers. A recent study found that 128 staff were entered as Mr, Ms or Mrs Dummy, while 40 people were apparently 200 years old after incorrect dates of birth were submitted to the PAYE system.

Over 80% of errors in employee data are due to an incorrect name, date of birth or National Insurance number so next time you change jobs, make sure your employer is reporting the correct information; or your savvy accountant may be in for a surprise at year end.

Winston Churchill was Prime Minister when PAYE first came in – now we have the joys of coalition government under David Cameron and Nick Clegg.

From 1 April 2013 all employers will be required to submit tax information in real time.

Go to the related articles below for comment and insight into the implications for business.

Detailed guidance information is available from the HMRC website.

HMRC doubles powers

HMRC has doubled the use of its powers of distraint - entitling it to seize a debtor’s assets - over the last year, it has been revealed.

The taxman used such powers against businesses 10,577 times in the year ending March 2012, a 92% increase on the 5,520 uses of distraint over the same period the year before, according to figures obtained by Syscap, a UK finance provider to the professions sector.

HMRC’s power of distraint enables their staff to visit a company’s premises without warning in order to collect unpaid taxes. If the company does not then pay its tax bill within five days, HMRC is entitled to remove and sell its assets, which can include computers, vehicles and other key equipment, without a court order.

Philip White, chief executive of Syscap, said: ‘Distraint is every bit as medieval as it sounds. If a business’s assets are seized and it can no longer fulfil customer orders, then that could easily and quickly spell disaster.

‘HMRC is unlikely to be able to auction off the assets at anything like their real value to the business, and the proceeds of the sale may not even cover the outstanding tax bill. In those circumstances the business would still face court action to recover the balance. White added that the use of distraint appeared to be part of a tougher stance taken by HMRC against late-paying businesses: ‘At the start of the recession HMRC was showing leniency towards businesses struggling to pay their tax bills through its ‘Time to Pay Scheme’ but we are hearing that it is becoming far harder for businesses to negotiate a grace period through the scheme.

‘All the evidence now points to a much harder line from HMRC, at the same time that businesses are still unable to rely on the availability of bank loans and overdrafts.’

‘While HMRC treats removing a business’s essential ‘tools of the trade’ as a last resort, if the business does not have any other liquid assets to its name then it will have no alternative but to do so.’

Amongst the sectors facing major tax payments at the end of this month are law firms, which will have to pay tax on partnership profits on 31 January, followed by the bill for Q4 VAT on 7 February.