As the UK economy continues to struggle in the midst of the global pandemic, propped up with various fiscal stabilisers provided by Rishi Sunak, one thing is clear: once this crisis over, the UK will have to repay a large debt mountain. An increase in tax revenues will of course be key when it comes to servicing this debt and there has been considerable focus recently on what changes to UK legislation will be made to fill this sizeable hole. All that will take several months.
For now, despite the difficulties imposed by Covid-19, HMRC is maximising tax collection using existing legislation. Nudge letters form an important part of this.
Nudge letters are in essence letters sent by HMRC to either a company or an individual, to remind them about certain aspects of the legislation that may be applicable, but which they have overlooked. Although these letters may appear to be speculative, they should not be ignored.
A recent round of nudge letters issued by HMRC in September related to transfer pricing, asking some UK businesses of multinational enterprises to review their transfer-pricing arrangements and consider whether appropriate profits have been attributed the UK, in relation to the value created, or whether profits have been diverted away from the UK. Disclosures of their transfer-pricing and thin-cap arrangements are to be made to HMRC within 90 days. Failure may mean that the company faces investigation, which could of course lead to tougher penalties if extra tax is found to be payable.
HMRC is nothing if not persistent. The September 2020 nudge letters follow another series relating to the diverted profits tax, which HMRC started issuing in January 2019. HMRC are clearly firm in their belief that, despite the UK having a lower corporate tax rate than many European countries and certainly well below the global average of 24 per cent, groups are still trying to divert profits away from the UK to lower-tax jurisdictions.
Companies which have received letters are painfully aware that the information requested by HMRC typically requires a significant amount of time to collate. At a time of global crisis, this often means that in-house teams are being taken away from focussing on dealing with crucial day-to-day functions of protecting trade, jobs and tax receipt generation. This must also be a time-consuming initiative for HMRC, but clearly one which is felt to be worthwhile because of the amounts of corporation tax believed to be at stake, coupled with the pessimistic estimate made recently by a thinktank that there could be an annual £200bn gap between tax receipts and spending.
HMRC should however perhaps consider these nudge letters more holistically. While specific campaigns may generate revenue in the short term, over the medium-to-long term multinational groups may relocate significant people and/or profit-making functions outside the UK, particularly where there may be clear future trading benefits (such as access to the EU or lower threat of future lockdowns), a significantly lower corporate tax rate or a more stable economic outlook.