UK Transfer Pricing - how it works

The UK transfer pricing rules apply to any arrangement between parties where there is a ‘participation’ connection.

This applies where companies are part of a consolidated group. It can also apply in a range of other circumstances including where rights will be acquired in the future, are aggregated for other reasons such as familial relations, and/or are part of a joint venture arrangement. The tests are broadened significantly for financing arrangements, when thin capitalisation tests are applied, to aggregate the rights of all parties ‘acting together’.

The definition of ‘participation’ is being considered under the 2025 consultation.

Scope of UK Transfer Pricing rules

The UK transfer pricing rules currently include a limited exemption for Small and Medium sized Enterprises (SMEs) based on a standard EU definition of SME but with some adjustments

Thresholds are tested including the whole of any consolidated group the taxpayer forms part of, potentially including some or all of the figures for associates and wider businesses with a less direct link.

The thresholds are applied on a period-by-period basis and require the SME to have:

• fewer than 250 employees
• either less than €50m in turnover or less than €43m in total assets

Taxpayers may elect out of the SME exception if they wish and HMRC may direct medium-sized groups to apply the transfer pricing rules. Transactions with certain ‘non-qualifying’ territories are excluded from the SME exemption regardless of group size. HMRC has a list of territories it considers to be ‘qualifying’.

The availability of SME exemption may be restricted under the ongoing 2025 consultation.

All UK entities within the UK transfer pricing rules must have as much documentation in place “as is reasonable given the nature, size and complexity (or otherwise) of their business or of the relevant transaction” to demonstrate that a tax return is correct and complete.

For groups with consolidated revenues of EUR 750 million or higher there is a specific form required, which should be prepared to support tax returns from periods starting on or after April 2023, under the Transfer Pricing Records Regulations 2023. The Regulations specify that the documentation requirement includes a ‘Master File’ and ‘Local File’, prepared in accordance with the OECD Transfer Pricing Guidelines. The law provides limited exemptions including immaterial transactions, certain UK:UK transactions and transactions covered by an Advance Pricing Agreement (APA).

For all other groups within the UK transfer pricing rules:

• HMRC recommends the preparation of a 'Local File' report when there are material controlled transactions
• HMRC deems alternative formats or record acceptable if they demonstrate an 'arm's length' result for the purpose of the transfer pricing rules.

UK taxpayers are not required to deliver any transfer pricing documents to HMRC as a filing obligation. However, failure to maintain documentation can lead to fines or tax-geared penalties. This will apply for any transfer pricing adjustments where the taxpayer cannot show that ‘reasonable care’ has been taken. There will be more significant penalties if errors can be argued to be deliberate.

HMRC has published guidance in its manuals on its expectations for documentation standards, which has been augmented by HMRC's Transfer Pricing Guidelines for Compliance (GfC7), relevant to record keeping and demonstrating ‘reasonable care’. The GfC7 includes a further recommendation for preparing:

• a ‘supporting information file’ of records that informed the filing position
• an ‘index’ of the ‘supporting information file’, as an annex to Local Files or as a record that could be provided in response to enquiry for UK businesses exempt from producing Local Files”

Transfer pricing documentation is generally to be provided to HMRC on request. HMRC information powers to demand documentation vary depending on the size of group and whether the request is made inside or outside of a formal enquiry.

For all UK entities, records of transactions with related businesses must be kept for self-assessment purposes, with a penalty of up to £3,000 for failure to keep and preserve such records. This applies generally and includes those records specified under the Transfer Pricing Records Regulations 2023. If insufficient transfer pricing documentation exists, it may impact on any subsequent penalty determination.

For groups with consolidated revenues of EUR 750 million or higher, other considerations include:

• HMRC can use its formal information powers to demand documentation from the filing date generally allowing a 30-day response time
• There will be a presumption of ‘carelessness’ on any HMRC adjustments resulting from enquiry or discovery assessment, unless this can be evidently displaced by the taxpayer.

For UK entities to which the Senior Accounting Officer rules apply, those entities must also monitor their transfer pricing and ensure that their tax accounting arrangements are appropriate.

The specific form of transfer pricing records and filing obligations may change under the 2025 Consultation.

Country-by-Country reporting (CbCR) has been introduced globally based on OECD recommendations. Like most other countries, the UK has a requirement for UK-parented groups with turnover over EUR 750m in the previous period to prepare and submit CbCR.

The UK is part of the wide-ranging multilateral information sharing regime associated with CbCR and will, therefore, share CbCR files submitted to it with relevant other tax authorities and will receive CbCR files for UK members of groups where filing is made elsewhere.

The UK has abolished its notification requirement ahead of CbCR and so notification is not needed for how the group will be meeting its CbCR obligations.

CbCR files need to be submitted in .xml format under the standard OECD schema. Taxpayers typically prepare a spreadsheet template and convert this using approved software before submitting it to HMRC. Find out more about our CbCR and XML services.

The CbCR documents are used for risk assessment by HMRC and other tax authorities, identifying groups with high potential transfer pricing risk that may become higher priority for a tax enquiry. Since the introduction of Pillar 2, CbCR filings are also used in the testing of safe harbour thresholds and it is much more important for groups to ensure a fully ‘qualifying’ CbC report is prepared than was the case prior to 2024.

Public Country-by-Country reporting

The UK does not itself have any public CbCR requirement, with documents filed only for the interest of HMRC and relevant overseas tax authorities.

The EU and Australia have introduced requirements for groups to publish at least partial details of their CbCR, allowing scrutiny of the relevant information by the public and raising the prospect of needing to consider the public relations implications of the content.

The EU requirements (explained here by BDO Global) apply to groups in CbCR with presence in one or more EU countries, subject to certain criteria, for periods commencing from June 2024 onwards. The Australian rules (explained here by BDO Australia) commence on the same timeframe.