UK Transfer Pricing

What is transfer pricing?

Transfer pricing describes the legislation and guidelines used to select and support “arm’s length” prices charged between associated enterprises. The arm’s length principle is key to transfer pricing and is the price which two unrelated parties would agree to pay for a product or service in the open market. Many tax authorities, including the UK, require transactions between associated parties (controlled transactions) to be recognised at arm’s length prices for tax purposes. Enterprises that fall within transfer pricing legislation are required to maintain transfer pricing documentation to support the arm’s length nature of their controlled transactions. In the UK, this documentation should be in place by the time the UK enterprise files its tax return.

UK permanent establishments (including branches) are subject to UK transfer pricing rules under the “separate entity principle”. The profits of the non-UK resident company that are attributable to the UK permanent establishment are those that must be recognised at arm’s length.

UK legislation on transfer pricing and documentation requirements for large businesses

The Transfer Pricing Records Regulations 2023 apply to very large UK businesses for accounting periods commencing on or after 1 April 2023 (and 2024-25 for income tax purposes) where the worldwide group’s turnover exceeds €750 million (MNE group test). UK entities that are members of a multinational enterprise (MNE) group that meets the Country-by-Country Reporting (CbCR) threshold in a given period are within scope of this legislation.

It is mandatory for such enterprises to complete a transfer pricing Master File and Local File, referred to as “specified transfer pricing records”.  An enterprise must submit these to HMRC, if requested, within 30 days. Penalties can be issued where the documentation is not provided within this timeframe.

The OECD Transfer Pricing Guidelines sets out the information that the UK enterprise is required to include in a Master File and Local File:

• Master File – provides an overview of the MNE group business, including the nature of its global business operations, overall transfer pricing policies, and global allocation of income and economic activity.
• Local File – provides more detailed information relating to intercompany transactions supplementing the information in the master file. The file’s objective is to document that the taxpayer has complied with the arm’s length principle in its material (HMRC manuals INTM450104) transfer pricing positions affecting a specific jurisdiction. It focuses on specific information relevant to the transfer pricing analysis related to the transactions taking place between the local country affiliate and associated enterprises. Information would include relevant financial information, a comparability analysis, and the selection and application of the most appropriate transfer pricing method.

The transfer pricing Master File and Local File should be reviewed and updated annually to confirm that the functional and economic analyses are accurate. Where the business description, functional analysis, and/or description of comparables have not significantly changed, they may be carried forward into the following period. Financial data within the documents, relating to the enterprise’s controlled transactions, must be updated annually to tie in with the financial statements.

Where an enterprise is not within CbCR but falls within the UK’s transfer pricing legislation

Entities within the charge to UK tax are required by law to retain records to deliver a correct and complete tax return. For UK entities that fall within the scope of UK transfer pricing legislation, an entity is required to retain records to demonstrate that transactions with related parties have been identified and determined for tax purposes according to transfer pricing rules and in particular, the application of the arm’s length principle. For those not within the mandatory requirement set out in section 2 above, HMRC has deemed that an appropriate way to demonstrate that provisions between related parties conform to the arm’s length principle is to prepare documentation in line with the OECD’s recommended approach, even where the MNE group test is not met. Therefore, in most cases, the preparation of the transfer pricing Master File and Local File will be the best approach to identity and support the arm’s length nature of a UK group’s intercompany transactions.

Exemption from the UK’s transfer pricing legislation

There is an exemption from the UK’s transfer pricing legislation for the majority of transactions carried out by small and medium-sized enterprises (SMEs).  HMRC can disapply this exemption for medium-sized enterprises in certain circumstances and issue a notice to require taxable profits to be calculated by applying transfer pricing rules. Further, if an SME is party to a transaction relevant to a patent box claim, a transfer pricing notice can also be issued to require the transaction to be computed under the transfer pricing rules.  The exemption does not apply to transactions with a related enterprise in a territory with which the UK does not have a double tax treaty with an appropriate non-discrimination clause. Finally, dormant companies are exempt from the UK transfer pricing rules if they were dormant on 31 March 2004 and have remained dormant since.

Note that under proposed reforms to transfer pricing, medium size enterprises may be removed from this exemption and the size of small enterprises increased.

Consultation on transfer pricing reforms

Two consultations on transfer pricing reform closed on 7 July 2025. One of the most important aspects for UK businesses is the proposal to introduce an International Controlled Transactions Schedule (ICTS) into the UK transfer pricing legislation. If implemented, this would require annual reporting on specific cross-border transactions with related parties, to be filed alongside each UK company’s tax return. This would be a significant development, though HMRC has not provided any dates for implementation yet.

How we can help

It is important for enterprises within transfer pricing to review their transactions with associated enterprises regularly to ensure that they apply to the commercial and economic substance of the local UK business and that they are being accounted for and implemented within the enterprise’s accounting systems correctly.  This is best done within the accounting year, or at the time of any proposed business changes, which will affect an enterprise’s intercompany transactions.

All UK enterprises that fall within UK transfer pricing should undertake a transfer pricing health check within the year and separately prepare transfer pricing Master File and Local Files where these are required. This will ensure that enterprises are compliant with current transfer pricing requirements before the scope of the new reforms becomes law.

For assistance with any of the above, or to arrange a transfer pricing health check, please get in touch.