UK tax risks persist as U.S. pillar 2 opt-out cuts top-up revenue

Traders Union
All News
Financial News
UK tax risks and pillar 2

Highlights

HMRC estimates UK revenue from pillar 2 top-up payments will fall to £1.6 billion annually from £2.2 billion after the U.S. opt-out agreement.
The House of Commons public accounts committee urges HMRC to intensify scrutiny of £21 billion in potential tax losses tied to cross-border profit shifting by large multinationals.
HMRC has never placed a business into special measures since 2016 and investigations of large companies average 17 months, with litigation cases extending up to eight years.

Parliamentary warning over pillar 2 enforcement

As reported by Financial Times, the House of Commons public accounts committee says the risk of large multinationals diverting UK profits offshore remains high despite the new global minimum tax framework. The committee calls on HM Revenue & Customs to intensify its scrutiny of tax losses tied to cross-border profit shifting and to improve how such cases are tackled.

According to the committee’s new report, international tax risks, including profit shifting to lower-tax jurisdictions, account for £21 billion of the £70 billion in tax under consideration in HMRC investigations into large businesses. The warning comes as companies in the UK submit their first returns under pillar 2, the global regime adopted by more than 100 countries that sets a 15% minimum effective corporate tax rate for multinational groups with revenue above 750 million euros.

Under the rules, if profits are taxed below that rate in one country, other countries can impose a top-up levy. The committee says the benefit of the system is likely to be reduced after the January agreement between the United States and its OECD partners to exclude U.S. companies, leaving U.S.-headquartered groups and their foreign subsidiaries subject instead to U.S. minimum tax rules and able to avoid pillar 2 top-up taxes.

Clive Betts, deputy chair of the public accounts committee, says the UK still risks losing a significant share of tax revenue overseas through cross-border diversion of multinational profits. He adds that HMRC should strengthen its understanding of how companies are complying with the new rules, particularly after the parallel agreement exempting U.S. groups.

Revenue impact and pressure on HMRC oversight

HMRC estimates that the U.S. opt-out reduces expected UK revenue from pillar 2 top-up payments to £1.6 billion a year from £2.2 billion, according to the report. The 29-page document, published on Friday, reviews HMRC oversight of businesses with more than £200 million in annual revenue.

The committee says HMRC’s compliance work with large businesses appears to be performing well overall. Its Large Business Directorate secured £15.8 billion in tax revenue in 2024-25 that otherwise would have been lost to the Exchequer.

At the same time, MPs say HMRC appears reluctant to use enforcement powers when large companies fail to cooperate. The report says the authority has never placed a business into special measures since gaining that power in 2016, and it urges a review of whether the threshold for using the regime is set appropriately.

The committee also says HMRC is taking too long to conclude cases involving large companies, with completed investigations averaging 17 months and cases involving litigation averaging eight years. It adds that the complexity of the UK tax system raises compliance costs for large businesses, with about half of the large business tax gap stemming from different interpretations of tax law by companies and HMRC.

HMRC says the UK continues to lead internationally in ensuring multinationals pay the tax that is legally due and that its approach is delivering tangible results. The Treasury has been approached for comment.

Our earlier report on the Conservatives’ proposed tax and regulatory agenda outlined Sir Mel Stride’s plan to loosen City regulation and review transaction taxes such as stamp duty and capital gains tax to support growth without weakening the public finances. It also highlighted the party’s emphasis on fiscal discipline and how tax policy and regulation are becoming key dividing lines ahead of the next election.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.