HMRC has launched a targeted campaign aimed at UK holding companies of overseas subsidiaries that claim deductions for management expenses. This initiative, often referred to as a ‘nudge’ campaign, is designed to encourage businesses to review their approach and ensure compliance with the rules.
Why is HMRC sending nudge letters on management expenses?
HMRC is sending letters to holding companies it believes may have incorrectly deducted management expenses.
The letters highlight a distinction between:
- Expenses incurred in managing a holding company’s investment business (generally known as ‘shareholder costs’), and
- Expenses incurred by the holding company that benefit the businesses or trades of its subsidiaries.
Where expenses relate to the subsidiaries’ trade or business, or a connected party, HMRC expects these to be disallowed unless recharged under transfer pricing principles to the relevant subsidiary.
HMRC also highlights that the key test for determining whether any charge should be recognised in the subsidiary is whether the subsidiary would have paid for the services provided, in other words, whether it would receive a benefit from those services or cost recharges absent the controlled relationship, and that any charge should be determined in accordance with the arm’s length principle.
Why HMRC is targeting management expenses
Incorrect treatment of management expenses can lead to disallowed deductions and potential transfer pricing adjustments. HMRC’s campaign signals a renewed emphasis on the issue of management expenses, and while we understand this campaign is aimed at very large businesses, we recommend all businesses that fall within the transfer pricing legislation take this opportunity to review their treatment of management expenses.
UK transfer pricing reform
The nudge campaign coincides with wider developments and reform in UK transfer pricing.
We expect to hear more at the Autumn Budget 2025 about the government consultations on the UK transfer pricing regime which we submitted responses to in the summer on:
- The scope of and proposals to amend UK documentation requirements, and
- Draft legislation reforming the UK’s transfer pricing, permanent establishment and Diverted Profits Tax rules.
The OECD is drafting updates to its Transfer Pricing Guidelines (Chapter VII) on intra-group services, expected in Spring 2026, and we should have access to the draft by the year-end. This guidance will have more on the transfer pricing benefits test, especially as to how it interacts with domestic laws that deny deductions for certain payments.
Key actions for businesses
HMRC’s campaign is a timely reminder to review your transfer pricing policies. We recommend that businesses should:
- Assess whether costs are being correctly deducted as management expenses and recharged to group companies at arm’s length,
- Ensure transfer pricing documentation is complete and up to date, and
- Respond promptly if you receive an HMRC letter and seek professional advice.
You may also want to and subscribe to our Budget analysis and register for our Budget webinar on Thursday 27 November to stay informed about any developments.
If you would like to discuss how any of the above affects your business or need support in reviewing your transfer pricing policies, please get in touch with Dawn Ross.
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Director, Peterborough
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