In recent years there has been an increasing focus on Inland Revenue enquiries, both for individuals and companies. The changes have arisen from a number of sources, including the Spend to Save initiative and the introduction of self-assessment. There has been an increasing focus on the powers of the Revenue to obtain access to information, and this article summarises some correspondence with Inland Revenue specialists. (Article by Adrian Rudd of PricewaterhouseCoopers, Tax Adviser's representative on the Technical Committee, published in April 2001 issue of Tax Adviser) In this correspondence the Institute advised that taxpayers are receiving examples of the Revenue asking for detailed information about transfer pricing at a very early stage in their enquiries into a return. The Institute felt it would be helpful to know whether this is a central policy decision, or whether particular districts had decided to do this independently.
The Institute quoted the following letter from a tax district office, which is not a district specialising a large businesses.
“Finally, I am concerned about the inter-company transactions going on, both trading and non-trading. I wish to have a good look at them and that is why these questions are being asked. Bearing in mind the fact that we are looking at the provisions of Section 770, is there any further information you believe we need to know. If there is, please forward it.
“As Section 28AA brings arms length pricing into CTSA and with the new documentary requirements, I assume that you have in fact carried out some kind of transfer pricing review for this company in respect of the accounts for the year ended December 1999. If this is the case, perhaps you could let me have sight of a copy of that report and provide me with details of all documents held to show that inter-company transactions are details at arms length, including third party comparison.”
The Inland Revenue International replied as follows:
“I cannot of course comment in detail on the letter quoted, as I do not have full information on the background to that particular case. However, your general concern appears to be that significant amounts of information are being requested at too earlier a stage in enquiries on transfer pricing matters.
“It is difficult to generalise across the whole range of transfer pricing enquiries, but I can make it clear that there has been no change in policy regarding this issue. I would normally expect the inspector to establish some general facts first, regarding the nature of the operations and the scale of inter company transactions, before requesting substantial amounts of prime documentation. The Revenue recognises that transfer pricing is complex and that raising questions on such matters can be both costly and time consuming – so we do not ask for further information about such matters lightly. It is up to the inspector to judge the importance of the issue in any particular case, and to then consider how matters can be dealt with most effectively.
“The introduction of Schedule 28AA and CTSA has not changed the fundamentals of transfer pricing - the arm’s length principle still underpins UK legislation. However by putting the onus on the taxpayer to arrive at an arm’s length result, it is certainly true that most companies have had to consider and codify their methodologies to a greater extent that they have previously.
“I think it is in this context that the inspector you quote may be asking for further information. If the company had undertaken a full transfer pricing review, and documented its methodology, then it might well be that this information will satisfy him and pre-empt the need for a raft of detailed questions. In other words, the inspector may be trying to shorten and hasten the process, rather than ask for fresh information which would have to be collated and interpreted.
“Overall I do not anticipate that CTSA returns will see information requests going beyond what might have beyond what might have been expected previously. The documentation of the methodology may indeed focus attention more sharply and at an earlier stage in areas where there are no black and white answers. What I can say is that the Revenue is not using the advent of CTSA to launch any special drive on international issues, and that overall the number of such enquiries should not materially increase.
“I know there are genuine concerns about how the new regime will work in practice, and it is one of my tasks within International Division to monitor the position as it develops. There is always a balance to be struck between maintaining the inspectors ability to raise legitimate enquiries, and ensuring that the compliance costs for taxpayers are minimised. If it emerges that further guidance is needed, either to taxpayers or to companies, then I will ensure that such information is provided as quickly as possible.”
020 7235 9381
April 2001 by