Written evidence submitted by TaxWatch (LBT0004)

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TaxWatch is an independent think tank and registered charity, established to promote sound administration and compliance within the UK tax regime. We conduct research and investigations into tax avoidance and evasion; and track how effectively and fairly HMRC is enforcing the tax obligations of different taxpayer groups.

Summary

1. Large business compliance yield (unpaid tax prevented or recovered) has not quite returned to its 2019-20 pre-pandemic peak, when inflation-adjusted. Nonetheless in 2024-25 HMRC’s large business compliance function delivered £58 of compliance yield for every pound spent – the highest of any taxpayer group. This value for money deserves recognition.

2. HMRC justifies its highly consensual approach to large business tax compliance on the grounds that “large businesses are generally compliant and cases of egregious behaviour are rare”. Nonetheless at March 2025 (the latest available figures) there was £3.5 billion of tax under consideration in ongoing enquiries into what HMRC classifies as profits diverted through “contrived and artificial arrangements” to minimise large companies’ tax liabilities. This amount increased by over £1 billion between March 2022 and March 2025.

3. Against moderately rising indicators of large business tax non-compliance, tools against non-compliance remain under-used. This includes the ‘persistently unco-operative large business’ penalty regime, introduced in 2016 following criticism from the Public Accounts Committee that penalties were not being imposed on obstructive or tax-avoiding large businesses. It has never been used against any company.

4. As evidence that the era of large businesses taking what HMRC consider to be aggressive tax positions is not entirely over, we summarise below public-domain information regarding what is likely one of HMRC’s biggest tax disputes, with over £1.5 billion of Diverted Profits Tax (DPT) and Corporation Tax at stake on payments to Switzerland, in part for services which HMRC has valued at zero. Details of the case are (unusually) visible in the public domain thanks to a series of associated court cases and public disclosures by the company itself.

5. This case also shows that government policy and recent legislative changes are explicitly encouraging large businesses, particularly those that HMRC assesses are diverting profits artificially, to access “less formal”, closed-door international tax settlement processes that take priority over UK courts. In this case, such processes have delayed the resolution of a multi-billion-pound UK tax assessment for over six years, and have allowed the disputed transactions, first put in place in 2009, to continue to the present day. Such processes may also hand over the determination of whether UK tax is due to foreign arbitrators whose deliberations and decisions remain entirely secret; and can impose all-or-nothing ‘baseball’ arbitration in which HMRC risks losing its entire claim.

6. HMRC has previously insisted that the DPT is out of scope of these treaty-mandated processes. However, legislative changes in Finance Act 2026 are intended to ensure that in future taxpayers can insist on such processes in DPT cases too.

Recommendations

HMRC should:

- provide a breakdown of large business compliance yield by different categories (upstream operational, cash expected etc.), as for compliance yield overall;

- disclose how many of FIS’ open civil and criminal investigations involve large businesses;

- set out revenue guardrails in the Litigation and Settlement Strategy for HMRC’s approach to Mutual Agreement Procedures (MAP), as it does for domestic tax settlements;

- disclose how many Mutual Agreement Procedures in the last 5 years have been decided by arbitration, what was the amount tax at stake, and in how many was HMRC’s position selected by the arbitrators.

Detail

7. HMRC generated £58 in compliance yield for every pound spent on large business compliance in 2024-25. The average across all taxpayers was £23.[1]  As the National Audit Office has recently noted, compliance yield from large businesses has doubled since 2020-21.[2]

8. Longer-term trends set this increase in context: 2020-21 was a historically low pandemic year, and large business compliance yield has still not quite reached its 2019-20 peak when adjusted for inflation (Figure 1).

Figure 1: HMRC’s Large Business Directorate compliance yield, 2017/18 to 2024/25 (2017/18=100)

Sources: HMRC annual report and accounts, various years; BoE inflation calculator

9. Moreover, 34 percent of large business compliance yield for 2024-25 is ‘upstream yield’, up from 15 percent in 2021-22.[3] Upstream yield is HMRC’s estimate of the non-compliance its efforts have prevented before it occurs.[4] By comparison, yield from HMRC’s ‘downstream’ compliance efforts with large businesses – the tax recovered from non-compliance that has actually taken place -- has risen more modestly, from £7.3 billion in 2019-20 to £10.4 billion in 2024-25 (equivalent to c.£8.4 billion in 2019-20 prices).[5] 
    
10. Prevention is commendable and cost-effective, but raises measurement questions. HMRC does not publish a breakdown of the different ‘upstream’ categories within its large business compliance yield, but since 2020-21 two-thirds of the increase in compliance yield across all taxpayers has been in ‘Upstream Operational’: the tax loss HMRC estimates it has prevented through nudges, closing loopholes, and deterrence, including “the deterrent impact achieved by securing certainty of tax treatment at litigation, deterring taxpayers from future non-compliance”.[6] This category has increased nearly five-fold since 2020-21 and is now the largest component of compliance yield measured across all taxpayer groups. HMRC has not published its methodology for measuring future non-compliance.
     
11. HMRC’s approach to large business compliance strongly prioritises cooperation over conflict, and “collaborative work with the business” over litigation.[7] HMRC justifies its consensual approach by its view that “large businesses are generally compliant and cases of egregious behaviour are rare”.[8] HMRC’s tax gap figures for large businesses compared to other taxpayer groups support this view.[9] However, several indicators of large business non-compliance are rising:

-          The total amount of ‘tax under consideration’ in large business tax disputes continues to increase faster than inflation, reaching £70.1 billion in October 2025, an increase of a third in just the six months from March 2025 (Figure 2). This is not a measure of tax avoided/evaded: enquiries may conclude that a smaller amount of additional tax is due, or no additional tax at all. However, its persistent growth alongside rising downstream compliance yield suggest that HMRC may be identifying more large business tax non-compliance.[10]

-          This £70.1 billion includes £3.5 billion (at March 2025) in inquiries into what HMRC classifies as profits allegedly diverted through “contrived and artificial arrangements” to minimise large companies’ tax liabilities through diverting profits.[11] This figure has increased by over £1 billion from March 2022, though involving a smaller number of businesses (Figure 3). Though it constitutes only 5 percent of the total tax under consideration in large business assessments, its increase indicates that HMRC considers that some large companies are still taking aggressive positions. 

-          HMRC told the NAO that it “estimates that the amount of tax unpaid by large businesses has been on a long-term downward trend”.[12] However, HMRC’s estimate of the large business ‘tax gap’ has in fact risen by £1.9 billion since 2020-21, having fallen from 2005-06 to 2020-21. The NAO attributes recent increases partly to a rise in the subset of the gap covering VAT, which is sensitive to fluctuations in trade volumes.[13] However, corporation tax does not generally suffer the same volatility, and the gross (pre-compliance) corporation tax gap for large businesses has remained persistently at around 6-7 percent of large businesses’ corporation tax liabilities since 2017-18, after previously falling for over a decade - leading to a nominal increase of over £2 billion since 2017-18 (Figure 4). 

Figure 2: Tax under consideration in large business compliance cases (£bn)

Sources: HMRC, Large Business Compliance Yield: technical notes; NAO, Taxing Large Businesses (March 2025)

Figure 3: Number of diverted profits reviews and tax under consideration, March 2019 to March 2025

Source: HMRC, Diverted Profits Tax/Transfer Pricing statistics

Figure 4: Gross large business corporation tax gap

Source: HMRC, Measuring Tax Gaps 2025

12. The large business corporation tax gap and other indicators of non-compliance have not decreased significantly since 2017 despite HMRC acquiring new compliance tools. These remain under-used or unused:

-          Finance Act 2016 introduced the ‘persistently-un-cooperative large business regime’, following criticism from the Public Accounts Committee that penalties were not being imposed on large businesses, especially in transfer pricing cases.[14] It gives HMRC powers to name and penalise large businesses that repeatedly take “speculative” tax positions, or have provided documents to HMRC with significant inaccuracies or omissions.[15] In 2016 HMRC told the PAC that this new regime would fill “a gap in the armoury.”[16] Yet HMRC has recently told TaxWatch that it has never applied these measures to any company.[17]

-          The Criminal Finances Act 2017 introduced a new corporate criminal offence of failing to prevent employees from facilitating tax evasion, as part of the government’s response to the ‘Swiss Leaks’ scandal which indicated that large international banks had facilitated tax evasion.[18] The first such charge was finally brought in August 2025:[19] though it is against an SME accountancy firm in Stockport, not a bank or large business. [20] The case will not be heard until 2027. HMRC stated in September 2025 that there were 11 further live investigations into this corporate criminal offence, across “all customer groups”, but did not specify how many large businesses are within this number.[21]       

-          HMRC stated in March 2026 that “there are a number of large businesses under civil or criminal investigation with HMRC’s Fraud Investigation Service” in cases involving transfer pricing or diverted profits.[22] However, HMRC was unable to tell TaxWatch how many such investigations there are, stating that FIS records are based on individuals, and do not systematically record companies with which such individuals may be associated.[23]

Case study: a £1.5 billion large business tax dispute
 

13. Rising compliance yields demonstrate value-for-money, but cannot show whether the amounts of tax recovered from large businesses are fair or accurate reflections of tax due.

14. Both HMRC’s Litigation and Settlement Strategy (LSS) and internal oversight structures have developed significantly since the PAC’s 2011 criticism of opaque large business settlements, and its 2016 examination of HMRC’s £130 million transfer pricing settlement with Google.[24] The NAO’s February 2026 report confirms that the era of ‘sweetheart deals’ is over.[25]

15. However, HMRC policy and changes to UK legislation are explicitly making it easier for large businesses to access opaque international avenues for settling controversies over cross-border tax transactions. One of HMRC’s largest disputes over alleged artificial profit diversion - and possibly one of the UK’s largest tax disputes overall – illustrates this issue.
     
16. Around 2011, HMRC opened transfer pricing enquiries into a London-based trading subsidiary of a multinational company.[26] HMRC claims that since 2013 the UK subsidiary has used fees for services and insurance paid to a fellow Swiss subsidiary to shift 80 percent of its operating profits from the UK to Switzerland, as well as using a similar arrangement structured as a derivatives contract from 2009 to 2013.[27] Between 2009 and 2024 this UK subsidiary booked nearly $1 trillion (£730 billion) of revenue in the UK, declared a pre-tax profit of less than 0.05%, and thus declared tax liabilities of just US$76 million (£57 million).[28]

17. In 2016, HMRC served the UK subsidiary with a Diverted Profits Tax (DPT) Charging Notice covering part of 2015.[29] There is no suggestion that the multinational or its subsidiaries have acted unlawfully. Nonetheless HMRC states that the DPT is intended to counteract “contrived and artificial”[30] arrangements by large companies to shift taxable profits to low-tax jurisdictions. Further HMRC assessments of DPT and additional Corporation Tax followed in 2018 and subsequent years, covering tax years between 2007 and 2025.[31]

18. Notably, HMRC claimed that fees paid to Switzerland for ‘non-routine services’ were not simply overpriced, but should be valued at zero,[32] noting that in the UK company’s representations responding to HMRC’s Preliminary DPT Notice, it “has not provided evidence of actual services provided, benefits received by [the UK company] and pricing”.[33] In the words of a Court of Appeal judgement on the subsequent DPT Charging Notice’s rationality, the company provided “a one page appendix…which gave “Examples of services provided by [the Swiss subsidiary to the UK subsidiary”. The appendix included very general statements….No details were provided. No calculations were provided for the value of these services in the relevant accounting period”.[34]

19. The Court of Appeal found that “the decision [by HMRC] to include a nil value for [these services] in the Charging Notice was clearly a rational one”, and that if the dispute continued, the case should be decided in the tax tribunal as usual.[35]

20. The company continues strongly to dispute HMRC’s assessments, arguing that the UK-Swiss payments attribute profit fairly to the UK company, equivalent to a 20 percent hedge-fund performance fee. It has also told TaxWatch that it has since provided HMRC “with many hundreds of pages of explanation and documentation supporting the substantial contribution of [the Swiss subsidiary] to [the UK subsidiary’s] ability to conduct its business.”

21. In 2019 the case finally arrived in the First-Tier Tribunal, already with over £450 million of tax at stake.[36] However, the company requested the case be stayed and moved instead into a Mutual Agreement Procedure (MAP): closed-door negotiations with the Swiss tax authorities under the terms of the UK-Swiss tax treaty. [37]

22. MAPs are now a standard part of tax treaty repertoire, but HMRC’s publicly stated position is that the Diverted Profits Tax (DPT) does not fall within scope of tax treaties and their MAP provisions.[38] In this case, however, HMRC considered that the treaty obliged it to discuss the MAP’s applicability with Swiss authorities. It wrote to the company that the case was “most definitely within MAP” and that it was “willing to discuss these [MAP requests] with the SCA [Swiss Competent Authority]”, but not until the UK appeals were stayed, withdrawn or finally determined. [39] Noting HMRC’s acceptance of the MAP process in principle, the tax tribunal ordered the case be stayed, dismissing HMRC’s preference for the domestic case to proceed first.[40]  HMRC decided not to appeal this decision.
     
23. MAPs are not covered by HMRC’s Litigation and Settlement Strategy. They generally take priority over domestic proceedings: as the authoritative commentary to the OECD model tax convention states, “in most cases it is the domestic recourse provisions such as appeals or court proceedings that are held in abeyance in favour of the less formal and bilateral nature of mutual agreement procedure”.[41] HMRC argues that MAPs do not replace the resolution of disputes between taxpayers and HMRC, but instead resolve disagreements between states over the allocation of taxing rights. However, this ignores the reality of MAPs, particularly with low-tax jurisdictions: they are initiated at the request of a taxpayer not the jurisdiction; and in cases involving cross-border transfers of profits, the allocation of taxing rights between the UK and a low-tax jurisdiction is the dispute with the taxpayer. In the MAP negotiations described above, the interest of the Swiss tax authority presumably lies in maximising Swiss taxing rights by arguing that the disputed payments to Switzerland are legitimate and accurately valued.

24. In this case, MAP negotiations regarding both CT and DPT assessments – which unlike a tribunal are invisible from public view - have now run on far beyond the HMRC/OECD target of 24 months for resolving MAP cases.[42] Tax under consideration plus interest has reached over £1.5 billion at December 2025,[43] equivalent to a quarter of HMRC’s £6 billion contingent liabilities relating to large tax disputes.[44] The company has confirmed to TaxWatch that the disputed UK-Swiss payments have not stopped or been modified since 2015.
     
25. DPT must be paid ‘up-front’ pending appeal, so despite these on-running negotiations HMRC has received around £1.1 billion of ‘up-front’ DPT payments. However, the public purse faces significant liabilities if the DPT charge is subsequently reversed through appeal or MAP. The multinational’s UK subsidiary accounts assume all its DPT payments will be repaid.[45]
     
26. UK policy also promotes the ability of cross-border taxpayers to demand that MAP cases go to mandatory binding arbitration if not resolved within a defined period (usually 2-3 years, depending on the treaty). [46] Mandatory binding arbitration remains controversial,[47] and only 34 of the 110 signatories to the OECD’s 2015 Multilateral Convention on tax treaties have agreed to it.[48] In 2021, HMRC and the Swiss tax authority signed an agreement[49] detailing mandatory arbitration procedures under the UK-Swiss tax treaty. This agreement allows the arbitrators – who are not judges or officials of either country – to set their own evidentiary and procedural rules; allows the taxpayer to veto the publication of the decision, unlike a court or tribunal; and in two of the three possible arbitration processes specified in the agreement, it mandates a ‘baseball’ (all or nothing) decision where arbitrators simply select one side’s position, and are specifically instructed not to provide any explanation of their decision.[50]  Only 25 of the Multilateral Convention’s 110 signatories (including the UK) have agreed to ‘baseball’ arbitration.[51]

27. These are the processes HMRC potentially now faces in this multi-billion-pound tax dispute. The company has told TaxWatch that the MAP will qualify for arbitration from May 2026.

28. Finance Act 2026 seeks explicitly to make it easier for cross-border businesses to insist that profit-diversion cases are handled through the same processes of closed-door negotiation and mandatory arbitration. It replaces the DPT with an equivalent charge to Corporation Tax[52] so that “businesses can benefit from access to the UK’s treaty network in the usual way, including access to the Mutual Agreement Procedure”.[53] 

29. The scale of the case described above is unusual. But the changes to treaty and domestic law described above may apply to a growing cohort of HMRC’s large business cases. Nearly 30 percent of tax under consideration in large business compliance cases concerns ‘international tax’ as of March 2025 (Figure 5), compared to just 12 percent in 2020.[54] And there is more tax under consideration in HMRC’s large business compliance cases with multinationals headquartered in Switzerland than in any other country after the USA and the UK (Figure 6).

Figure 5: top categories of ‘tax under consideration’ by HMRC’s Large Business Directorate, average 2020-25

Source: HMRC, Large Business Compliance Yield: Technical Notes

Figure 6: Large Business cases by taxpayer’s ultimate parent jurisdiction (excluding UK and ‘other’)

Source: HMRC, Large Business Compliance Yield: Technical Notes