Transfer pricing: new HMRC guidelines for compliance

The new Guidelines for Compliance for Transfer Pricing were issued on 10 September 2024 and are relevant to all UK businesses caught by the UK’s transfer pricing legislation. GfC7 applies to businesses operating in the UK or which have a presence, regardless of head office location. It covers transactions between parties falling within the UK transfer pricing legislation, including transactions with related UK entities. These include:

• largest businesses where master and local file documentation requirements apply
• businesses who may be exempt from the master and local file documentation requirements but must still file and be able to support an arm’s length return (large and certain medium-sized enterprises)
• businesses falling within the scope of transfer pricing rules for the first time.

What's in the new guidelines?

The compliance guidelines discuss the importance of appropriately scoping the transfer pricing work undertaken by taxpayers or third parties, linking the effort and resources employed in the design, documentation and implementation of the transfer pricing policies to the mitigation of penalties.

GFC7 also walks through key areas of risk in the documentation and evidence of transfer pricing. It also highlights the following seven areas of policy design that HMRC considers to display common indicators of high-risk approaches:

• Franchise fees
• Intangible assets
• Above market intra-group services
• Target margin models
• Cost-based reward for services
• Sales-based reward for services
• General risk in policy-setting approaches

The overriding emphasis of GfC7 is that businesses should take an active interest in designing and validating its transfer pricing policies – and not leave responsibilities solely to the tax team. Penalties are also more likely to be applied if the business isn't shown to be involved. 

Who are the guidelines aimed at?

The new guidelines are split into three parts, with an additional annex, each aimed at slightly different audiences.

Part 1 is aimed at ‘UK risk leads and their associated group functions’ in establishing and evidencing effective UK transfer pricing compliance processes. These ‘risk leads’ could include the UK tax compliance manager, finance director, finance controller, environmental, social and governance (ESG) lead and senior accounting officers (SAOs).

Parts 2 and 3 are relevant for ‘transfer pricing specialists’ in best practice policy and documentation approaches. These specialists include individuals who have experience in transfer pricing compliance. The guidelines are relevant to both in-house tax and external transfer pricing specialists.

Annex A assists all with examples of helpful supporting records and information.

10 key takeaways from GfC7

1 HMRC emphasises that transfer pricing should not be considered solely as a responsibility of tax teams. An active interest should also be taken by the business with policies being designed in tandem with, and validated by, the business.

2 GfC7 frequently mentions the application of penalties, with greater risk of application if the involvement of the business is not evidenced. This also indicates that the trend of seeking to apply penalties to transfer pricing adjustments is not likely to abate any time soon.

3 The guidelines discuss the importance of appropriately scoping the transfer pricing work undertaken by the business or third parties, linking the effort and resources employed in the design, documentation and implementation of the policies to the mitigation of penalties.

4 HMRC indicates that an over reliance on contractual and legal arrangements that are divorced from operational reality carry a high risk of transfer pricing error. For example, it is recognised that target margin policies can be appropriate but warns that these need to be supported with clear evidence that commercial activity also aligns with what has been contractually documented.

5 Services transactions are discussed at length with a focus on the analysis of the cost base and distinguishing low value services from those that could attract a greater reward.

6 Bundling and pricing transactions under a single fee may be practical for taxpayers but HMRC cautions that these arrangements often do not reflect arm’s length prices when broken into their constituent elements.

7 Centralised preparation of documentation outside of the UK needs to ensure that there is evidence of the UK business reviewing the facts supporting the functional analysis and checking the relevance of facts and analysis to the UK entity.

8 This localisation theme is continued when comparability analysis is considered. HMRC expects UK specific comparability factors to be reflected in the analysis, which should be repeated in full every three years at a minimum.

9 Unlike other countries, in the UK comparable adjustments are not mandatory, however GfC7 strongly hints that more thought should be given (including evidencing those thoughts) to applying comparability adjustments in order to refine the analysis and reduce the risk of HMRC challenge.

10 Financial transactions are only touched upon in GfC7 but, in the future, HMRC may develop further guidelines for compliance to cover these transactions in depth. 

Achieving transfer pricing compliance

Every group is unique and faces its own set of transfer pricing challenges. These vary enormously depending on where your organisation is positioned in its business life cycle, your industry and how you have structured your commercial operations. Whether transfer pricing is a relatively new requirement, or you need reassurance and validation that your policies remain compliant and support positive commercial behaviour, GfC7 aims to reduce the uncertainty for businesses in scope, lower the risks and help you avoid some of the most common mistakes.

For more insight and guidance, or support with compliance, get in touch with Kirsty Rockall, Liz Hughes or Nick Warth.