Following the release of the Transfer Pricing Records Regulations in 2023, HMRC updated its guidance for compliance manuals to include Transfer Pricing in September.
For those not already in the know, the Transfer Pricing Records Regulations (“TPRR”) released last year set a requirement that UK businesses that are part of a qualifying MNE[1] (broadly, those with Group turnover of 750m Euros or more) are required to maintain contemporaneous Local File and Master File documentation in accordance with the OECD-prescribed[2] format. There are exceptions that may mean the Local File does not need to be prepared, but broadly speaking, UK entities that are within large groups now have a formal TP documentation requirement with very clear guidance on what needs to be included within that documentation.
Prior to this, the UK regulations were somewhat woolly and called for documentation to be prepared that was proportionate to the scale and complexity of the arrangements being documented, with no explicit threshold on either transaction value, scale of the MNE, nor proportionality of the transaction to the MNE. This is effectively still the case for those MNEs that are too large to qualify for SME[3] exemption, but too small to be within the scope of the TPRR.
Best practice for such businesses is, of course, to undertake detailed analysis and set an arm’s length policy in advance of concluding any related party transactions and then preparing thorough OECD-compliant Master File and Local File documentation on an ongoing basis. However, best practice is not always practical in light of the administrative burden involved, the resources available to the business, and everything else that may be competing for those resources.
The new compliance guidelines should therefore receive a warm welcome, as they are designed to help UK businesses understand how to best to manage transfer pricing compliance, highlights common compliance risks and provides some detail on practical matters such as filing tax returns, making adjustments and seeking clearances.
We have in the past seen businesses prepare ‘documentation’ as a tick-the-box exercise, with particularly bad examples either indicating that the business did not implement its own transfer pricing policies correctly, or that the policies were designed for a business that bore very little resemblance to the one that had supposedly been ‘documented’.
The guidelines for compliance include a recommendation to maintain source evidence (such as copies of interview notes etc) that can support the analysis undertaken when setting the policies, and coming to the pricing conclusions. This recommendation is aligned with the TPRR and from our experience of transfer pricing enquiries, can mean the difference between success and failure when seeking to evidence that the transfer pricing outcomes are aligned with the facts of the business and that a taxpayer took due care in filing tax returns. This is often overlooked on the assumption that having some form of transfer pricing documentation on file will be enough to satisfy any and all tax authorities.
The guidelines, though incredibly helpful, will not however be a panacea for tax and finance teams and it is likely that professional transfer pricing advice will still be required. Generally, the earlier in the process businesses engage a professional, the better: company resources are far better spent setting the right transfer pricing policy for the facts of the business and investing on getting the implementation of that policy right than it is trying to defend historical transactions.
The Guidelines for Compliance regarding Transfer Pricing can be found on HMRC’s website here.
Many businesses may be anticipating changes to their operating structures as we await to see the first Budget from the new Labour Government, and this may lead to new or altered intra-group arrangements, for which the transfer pricing policies should be reviewed.
If you are in this situation and would like to discuss the transfer pricing arrangements for your group, please do get in touch with us. Claritas is one of the UK’s leading, full-service tax advisory and compliance practices. By combining our extensive practice and industry experience, we’re able to ensure you receive the very best tax and transfer pricing advice, whether that be in helping you establish new policies, supporting you with compliance, or reviewing your existing policies and procedures to ensure they are still fit for purpose.
If you have any further questions, then contact our expert Tom Prescott today at tom.prescott@claritastax.co.uk
[1] Multinational Enterprise
[2] Organisation for Economic Cooperation and Development
[3] Small and Medium Enterprise
