Publication featured in: the Guardian, Daily Mail, Accountancy Today, Accountancy Daily, Business Matters, The Irish Times, and International Tax Review
HMRC believes US companies underpaid £5.6bn in UK tax last year*, up 14% on the £4.9bn that HMRC felt US businesses had underpaid in the previous year.
US companies now make up almost half (48.6%) of the suspected underpaid tax from all foreign companies operating in the UK up from 45.2% in the previous year.
HMRC suspects tax underpaid by all foreign companies hit £11.5bn in total last year, 6.9% higher than in 2021/22 when £10.8bn was suspected of being underpaid.
Transfer pricing
Some US multinationals, including major US tech businesses, have been accused of aggressively diverting their earnings from the UK to lower-tax jurisdictions to significantly reduce their UK tax bills through ‘transfer pricing'.
Transfer pricing is when one company in a group pays another overseas company in the same group for goods or services – for example, using their intellectual property. But some US companies have been accused of using this system too aggressively, artificially reducing their UK earnings and therefore paying less UK corporation tax.
Examples
In October 2023, US tech giant Microsoft agreed to pay HMRC £136m in back taxes amid concerns that it had shifted its revenue from the UK to another country to pay a reduced tax bill.
Netflix announced in November 2020 that it would start to declare its revenue from UK subscribers to the UK tax authority. Previously, the TV streaming service had booked earnings from UK subscribers through its European headquarters based in the Netherlands.
Andrew Snowdon, partner and head of tax from our London office claims:
“Global tax authorities are becoming even more determined to claim all the tax owed from large multinationals. It is often pointed out that US tech companies, sometimes pay a much smaller amount of tax than some would expect.”
“Efforts are being made globally to ensure that companies pay an appropriate amount of tax in the countries where their sales are made. Several likely rule changes in the imminent future would make it even harder to divert earnings overseas and subsequently more difficult to underpay tax.”
The UK's Digital Services Tax
The UK’s Digital Services Tax was introduced in 2020, imposing a 2% tax on digital revenue made in the UK for companies with digital activities worth more than £500 million and which generate more than £25 million of revenue from UK users. The tax has already generated £947m in income for HMRC in its first two years.
However, the Digital Services Tax is intended to be a temporary measure in place before new international tax rules are introduced by the OECD. These new rules intend to stop aggressive use of transfer pricing, ensuring that companies pay tax in the country where they make their sales. The new OECD global tax framework has been drafted and is awaiting final ratification.
A minimum 15% corporation tax rate is being proposed as part of these new rules. This is intended to disincentivise companies from diverting their earnings to another country which offers lower taxes.
*2022/23 tax year. HMRC’s estimate of tax that is underpaid by businesses. That estimate is made prior to full investigations of those businesses.
