HMRC is sending the letter to large businesses as part of an educational awareness campaign highlighting common issues with management expenses. The letter identifies the companies that have claimed relief for management expenses and the period or periods the claims relate to. The group is asked to review HMRC’s guidance on the tax treatment of management expenses and check the relevant tax returns for inaccuracies.  

The letter reminds the group of the rules applying where a holding company incurs “expenses with a distinct benefit to a connected party”. HMRC says that, for the holding company to claim a deduction for expenses of this nature, it must be the case that the expenses were “incurred as part of a trade which involves providing services to that connected party”. In those circumstances, HMRC “would expect a service fee to be charged” in accordance with the transfer pricing rules, including the arm’s length principle.  

Where an inaccuracy is found in a company tax return, the company should amend the return and let HMRC know. If the company is out of time to amend the return, it should contact HMRC. HMRC says that it may treat any changes made to tax returns due to receiving the letter as unpromoted for the purposes of determining penalties for inaccurate returns. However, if HMRC takes action in the future relating to claims for management expenses and finds an error, it will treat any disclosure made at that stage as prompted.  

HMRC recommends that the recipient of the letter shares the letter with the group’s UK senior accounting officer, if it has one, and its advisers if deemed appropriate. A copy of the letter has been sent to the group’s agent dealing with its corporation tax affairs.  

Further information 

• Template letter – group 
• Template letter - agent