HMRC targets management expenses - what large businesses need to do now
HMRC has begun issuing letters to large businesses as part of an educational campaign highlighting common errors in claiming management expenses.
If your group has received one of these letters, it’s important to understand what HMRC is looking for, and how to respond.
HMRC targets management expenses – what are they looking for?
The letters identify the periods in which management expense relief has been claimed and ask groups to:
- Review HMRC’s guidance on the tax treatment of management expenses
- Check past corporation tax returns for any inaccuracies
- Make amendments where necessary
- Contact HMRC if the time limit for amending has passed
HMRC notes that any changes made now may be treated as unprompted disclosures, potentially reducing penalties. However, if HMRC later investigates and finds errors, disclosures will be treated as prompted, increasing penalty exposure.
Key Issue: Management Expenses benefiting connected parties
A major focus is on situations where a UK holding company incurs expenses that benefit a connected party (for example, an overseas subsidiary).
To claim a deduction, HMRC expects:
- The holding company to be carrying on a trade of providing services to that connected party; and
- A service fee to be charged, priced at arm’s length in line with transfer pricing rules.
Where no service charge exists, or where transfer pricing evidence is weak, HMRC may challenge the deduction.
HMR targets management expenses – what should goups do?
If your business receives this letter, HMRC recommends sharing it with:
- Your Senior Accounting Officer (SAO), if applicable
- Your tax advisers
Given increased scrutiny in this area, now is the time to:
- Review management expense allocations
- Check transfer pricing documentation
- Confirm whether appropriate service fees are being charged
- Assess whether holding companies are genuinely carrying on a trade
How RPGCC can help
RPGCC’s tax team advises UK and international groups on management expenses, transfer pricing, SAO compliance and corporation tax risk management. We can help you:
- Review HMRC’s concerns in the context of your group
- Assess whether expense allocations and service charges are compliant
- Prepare amendments or disclosures, where appropriate
- Strengthen documentation to reduce future risk
If your business has received one of these HMRC letters, or you want a proactive review, please get in touch with our corporate tax specialists.
