Following the release of the Transfer Pricing Records Regulations in 2023 (“TPRR”), HMRC updated its guidance for compliance manuals to include Transfer Pricing (“TP”) in September.
This is valuable for those businesses that are within the scope of UK Transfer Pricing rules but weren’t specifically catered to in the TPRR. As we’ll explore below, this compliance guidance offered a good balance between managing TP risk and not overburdening businesses with admin.
For those not already in the know, the TPRR released last year set a requirement that UK businesses that are part of a qualifying Multi National Enterprise (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 Organisation for Economic Cooperation and Development -prescribed 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 Small and Medium Enterprise 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 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 timing of the release of this guidance seems to be at odds with some of the corporate tax roadmap actions announced deep within the written Autumn Budget 2024 announcements.[1] These actions include consultations concerning reform of the transfer pricing, permanent establishment (“PE”) and diverted profits tax rules (“DPT”).
Some of the roadmap consultation proposals are likely to be welcomed by businesses, such as potentially making DPT part of the corporate tax regime, rather than a standalone. The implications of that would be that businesses suffering DPT charges may be able to avail the UK’s large double tax treaty network to mitigate double taxation, which is not currently possible.
Coming back to TP, the roadmap consultations here are less likely to be looked at fondly, and seem to be moving in the opposite direction of the practical compliance guidance, which could be summarised as a lighter touch makes sense for smaller businesses. The TP elements proposed for consultation include:
- Requiring an informative return to be prepared and submitted.
Currently transfer pricing documentation only needs to be submitted to HMRC on request. A schedule of transactions (sometimes limited to international transactions) is a requirement in a number of territories, and so there is precedent for this. Preparing the schedule is unlikely to be a significant admin burden for those businesses that already have well-developed TP policies and implementation and government procedures in place. There may also be a benefit for those businesses in that an informative return should, in theory, allow HMRC to take a much more targeted approach to TP enquiries, and only focus on those higher risk businesses. However, for businesses that have been less diligent regarding TP risks, preparation of such a return is likely to be an administrative pain and may also bring the threat of an enquiry with it.
- Amending the SME exemptions.
Our current working assumption is that the SME exemption will be amended such that ‘Medium’ businesses would no longer qualify. If that’s the case, only businesses which qualify as ‘Small’ would be able to continue to rely on the exemption, being a business with (a) fewer than 50 employees and (b) either annual turnover or balance sheet total is EUR 10mn or lower.[2]
Such an amendment would have a significant impact on the number of UK businesses that would be within the scope of transfer pricing rules. Following the guidance in the TPRR and the compliance guidelines, many of those would be expected not to have a documentation obligation (given the assumption is that a lot of Medium businesses would have low levels of transactions, and those may be wholly UK domestic arrangements). However, those businesses will still need to take steps to make sure that they are aware of, and meeting, and obligations under the UK TP regulations: they’ll need to cross a mountain to know it was a molehill.
The Guidelines for Compliance regarding Transfer Pricing can be found on HMRC’s website here.
The first Budget from the new Labour Government, may have triggered some businesses to review their operating structures, 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. We will be issuing updates as and when more detail is available on the corporate tax roadmap and the consultations. If you would like to sign up to receive our newsletters, please scroll down and click on the ‘subscribe to our newsletter’ icon and complete your details on our online form.
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.
[1] The details of the roadmap did not feature in Rachel Reeves’ speech. This is perhaps unsurprising given the thrust of her speech was repairing a system ravaged by the Conservative party, and several of the roadmap actions had first been put on the agenda by the Conservative party.
[2] Per the current definitions, as set out in Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (Text with EEA relevance) (notified under document number C(2003) 1422).
If you have any further questions, then contact our expert Tom Prescott today at tom.prescott@claritastax.co.uk
The information appearing in this article has carefully been prepared but does not constitute as professional advice and is provided for general information purposes only.
