UK: Closure notices for transfer pricing enquiries, despite ongoing diverted profits tax review (First-tier Tribunal)
First-tier Tribunal directed HM Revenue & Customs (HMRC) to issue closure notices.
Despite ongoing diverted profits tax review (First-tier Tribunal)
The First-tier Tribunal directed HM Revenue & Customs (HMRC) to issue closure notices in relation to transfer pricing enquiries despite ongoing diverted profits tax review.
The case is: Vitol Aviation UK Ltd v. Revenue & Customs  UKFTT 353 (TC). Read the decision.
This case will be of interest to companies with ongoing transfer pricing enquiries in situations when diverted profits tax (DPT) notices—sometimes referred to lightly as HMRC’s “big stick”—have been issued (or may be issued) and the enquiries have reached an advanced stage at which HMRC has been provided with all reasonably required information to make an informed judgement as to the matters under enquiry.
In this case, several subsidiaries (the taxpayers) in a global energy and commodity trading group applied to the First-tier Tribunal for closure notices with regard to HMRC enquiries into corporation tax self-assessment returns filed by those companies for the accounting periods ended 31 December 2016-2018.
The closure notices were requested to bring HMRC enquiries to a conclusion. The enquiries related to the determination of whether arm’s length prices were charged for the services supplied by two UK group companies to an associated enterprise in Switzerland. The impetus for these enquiries and the diverted profits tax notices was a request from the applicants for a bilateral UK-Switzerland advance pricing agreement (APA) in 2015, shortly before a previous unilateral APA was due to expire.
The benefit to the taxpayers of HMRC issuing closure notices, was that they could then appeal the closure notices (assuming they disagreed with the quantum of the adjustments) so that any litigation was a corporation tax—rather than a diverted profits tax—matter. If, alternatively, the taxpayers had amended their return themselves (i.e., to address the diverted profits tax charge) they would not be able to appeal. When no amendment is made during the diverted profits tax review period (absent the issue of a closure notice) then on expiry of that review period, the taxpayers’ only option to recover the diverted profits tax would be to litigate against that assessment.
Decision of First-tier Tribunal
Paragraph 33 of Schedule 18 FA 1998 (Para 33) allows a company to apply to the tribunal for a direction that HMRC give a partial or final closure notice within a specified period. The tribunal is to give a direction unless it is satisfied that HMRC has “reasonable grounds” for not giving a partial or final closure notice within a specified period. Para 33 places the burden of proof on HMRC to demonstrate the reasonable grounds for not giving a closure notice within a specified period.
The tribunal granted the taxpayers’ request for closure notices on the grounds that HMRC had sufficient information to close the enquiries and had failed to show that there were reasonable grounds for refusing the application to issue a closure notice.
HMRC was directed by the tribunal to issue closure notices within 30 days of the date of the decision in respect of each of the enquiries covered by the application.
HMRC put forward two main arguments why there were reasonable grounds for refusing to issue closure notices:
- The taxpayers had not provided information reasonably requested by and required for HMRC to arrive at conclusions needed to formulate closure notices.
- The issue of closure notices would pre-empt the end of the diverted profits tax review periods for these companies.
Ground 1: requested information outstanding
The tribunal found that by November 2020, when HMRC had sent a detailed letter to the taxpayer setting out the HMRC position on the taxpayer transfer pricing model, HMRC was in a position when they had made an informed decision as to the relevant matters under enquiry and had set out their conclusions and a basis on which amendments could be made to the relevant returns.
The findings in this case will be relevant more broadly when considering whether HMRC has been provided with all reasonably required information to make an informed judgement on transfer pricing matters under enquiry. The tribunal noted that it is not reasonable for enquiries to be kept open so that HMRC could refine details of the conclusions in the manner suggested by HMRC in this case. Given the inherently imprecise nature of transfer pricing, refinements of calculations could continue indefinitely without ever reaching a conclusion. The decision notes that this was recognised by the OECD as the requirement was that a “reasonable estimate” be made—rather than expecting transfer pricing to be an exact science.
There were also some interesting findings in relation to the method by which a taxpayer can make confidential data available to HMRC.
Ground 2: DPT review has not ended
The tribunal did not accept any of the submissions made by HMRC that the tax administration should not be required to issue closure notices as this would pre-empt the end of the diverted profits tax review periods for these companies.
The decision refers to a 2018 statement of the Economic Secretary to the Treasury (referenced by HMRC in the submissions in this case). In the view of the tribunal, this statement provided evidence that what is sought by the diverted profits tax legislation is that companies pay the correct amount of corporation tax, and therefore corporation tax on diverted profits is considered a desired outcome of the rules. As HMRC had established, what was considered to be the correct amount of corporation tax to be paid on the profits in dispute, followed that “the purpose of the DPT legislation would be satisfied if the closure notice is issued in this case as the effect of issuing the closure notice would be to give the intended effect to the provisions of the DPT legislation.”
The tribunal decision, if it stands, is expected to reduce the effectiveness of the diverted profits tax as a means of incentivising taxpayers to make voluntary adjustments to their transfer pricing. The end of the 15-month diverted profits tax review period was a daunting prospect for taxpayers, and the confirmation from the tribunal that Para 33 applications for closure notices can be granted within the diverted profits tax review period will be viewed as welcome relief.
Read an October 2021 report prepared by the KPMG member firm in the UK
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