Transfer pricing consultations: Saffery recommends simpler paperwork for medium sized businesses if exemption ends

Saffery has submitted responses to two government consultations on the UK transfer pricing regime – one on the scope and documentation requirements and another on draft legislation reforming the UK’s transfer pricing, permanent establishment and Diverted Profits Tax rules.

Understanding transfer pricing – the basics

Transfer pricing refers to the prices charged for products and services between associated enterprises. To ensure that appropriate profits are taxed in each jurisdiction, tax authorities around the world, including HMRC in the UK, require these transactions to be priced on an ‘arm’s length’ basis. This means the prices must reflect what two unrelated parties would have agreed to pay for the product or service in an open market.

Multinational groups within the scope of the UK’s transfer pricing rules are required to maintain documentation demonstrating that their controlled transactions have been recognised on an arm’s length basis.

Transfer pricing – scope and documentation

The first consultation considers proposals to amend the exemption for small and medium enterprises (SMEs) from UK transfer pricing and require multinational enterprises (MNEs) to report information on cross-border related party transactions through an International Controlled Transactions Schedule (ICTS).

Our response highlights that:

• We strongly support keeping the exemption for small enterprises to avoid disproportionate compliance burdens.
• We recommend simplifying the thresholds for the SME exemption and for them to be applied at the UK entity level for small enterprises.
• We suggest the thresholds are reviewed for inflation and applied more practically.
• If the exemption is removed from medium sized enterprises, documentation requirements must be limited and subject to further consultation.
• Definitions around natural persons, investment funds and enterprise groupings need clearer legislation and/or guidance to reduce unnecessary work.
• If introduced for all entity sizes, the ICTS should be proportionate to the size of the enterprise falling within transfer pricing.
• Financial thresholds should be reviewed over time.
• Requests within the ICTS should be streamlined to avoid duplication, cost and confusion.

Read our full response

What next following the scope and documentation consultation?

Once the government has analysed the consultation responses, it will publish its findings, including an assessment of the potential benefits and costs of the proposed measures. If it concludes that there is merit in introducing either or both changes, officials will begin work towards implementation at a future fiscal event.

Reform of transfer pricing, permanent establishment and Diverted Profits Tax

The second consultation builds on a policy consultation held in summer 2023 and focuses solely on the technical aspects of draft legislation for reform of the UK’s international tax rules on:

• Transfer pricing,
• Permanent establishment, and
• Diverted Profits Tax.

Our response highlights that:

• Procedural guidance is needed on the UK:UK transfer pricing exemption.
• While valuation alignment for transactions involving intangible fixed assets is helpful it creates a misalignment with chargeable gains.
• Further safeguards are required.
• The changes create certainty around implicit guarantees.
• The acting together rules are potentially broader and still subjective.
• Where the government has committed to providing guidance, this guidance must be subject to proper consultation.

Read our full response

What next following the technical consultation?

Once the government has analysed the feedback it will publish its response together with legislation for inclusion in Finance Bill 2025-26.

How we can help

Our experienced and dedicated transfer pricing team, led by Dawn Ross, can assess the impact of the proposed changes on your UK transfer pricing obligations. See the transfer pricing services we offer and if you’d like to discuss the changes, please talk to your usual Saffery contact or get in touch with Dawn.

If you’d like to discuss how the proposed changes to the law on permanent establishment and Diverted Profits Tax will affect your business, or more widely how we can assist you with international corporate issues please talk to your usual Saffery contact or get in touch with Robert Langston or Zoe Thomas.