Alongside the Budget, on 30 October 2024, the Government published a roadmap setting out its plans for corporation tax. This will be followed by a consultation in spring 2025 on several reforms related to transfer pricing.
- The potential removal of UK-to-UK transfer pricing, which would reduce the UK compliance burden
- Lowering the thresholds for exemption from transfer pricing for medium-sized businesses to align with international peers and manage risks to the UK tax-base, retaining an exemption for small businesses
- Introducing a requirement for multinationals in scope of transfer pricing rules to report cross-border-related party transactions to HMRC. This will help facilitate better identification of transfer pricing risk and allow for more targeted enquiries
- Reviewing the transfer pricing treatment of cost-contribution arrangements, where the costs and benefits of developing intellectual property are shared by group companies. This will ensure that the rules are certain and don't act as a deterrent to investment that brings economic benefits to the UK
- Supporting the OECD’s Pillar One Amount B initiative
What do these reforms mean for organisations?
The exemption of UK-UK transactions from the legislation is to be welcomed, although this exemption is unlikely to be provided in cases of a material tax advantage. The former is yet to be defined and could include taxpayers within the bank-levy charge and patent box regime, or those with significant research and development (R&D) credits or losses. It's also uncertain as to whether taxpayers will be able to disapply the exemption if they wish to access the compensating adjustment mechanism.
The impact of the exemption will be balanced by the expansion of the transfer pricing legislation to include medium-sized businesses. A new definition of the thresholds will likely be included in the spring consultation.
This will require many more organisations to prepare formal transfer pricing documentation. Although these taxpayers wouldn't be formally obliged to keep and preserve a master file and UK local file, HMRC states in its guidance and the Guidelines for Compliance 7 (GfC7), that an appropriate way to demonstrate that provisions between related parties adhere to the arm’s length principle is to still prepare documentation in line with the OECD’s recommended approach, ie, a local file.
Transfer pricing thresholds
A comparison of the current thresholds and the potential new thresholds is depicted in the diagrams below.
Current UK transfer pricing thresholds (group level)
![Current UK transfer pricing thresholds]()
Potential UK transfer pricing thresholds (group level)
![Image of potential UK transfer pricing thresholds]()
The expansion of the UK transfer pricing legislation won't only impact the tax and finance teams, but also the commercial business. This is due to the time and resource that will be required by taxpayers to adhere to the compliance requirements. HMRC emphasises in the GfC7 that transfer pricing shouldn't be considered solely as a responsibility of tax teams. An active interest should also be taken by the business with transfer pricing policies being designed in tandem with, and validated by, the business.
The additional cross-border reporting requirement has been included in the diagram above. There will be a consultation in the spring about whether such a requirement should be introduced and what this reporting requirement could entail.
Unlike the defunct summary audit trail, this requirement will require information to be submitted to HMRC. Although this will form part of taxpayers’ corporate tax reporting requirements, the cross-border reporting requirement may be a separate submission to the corporate tax return.
Preparing for the consultation
Taxpayers currently in the small and medium-sized ‘buckets’ should keep a close watch on the consultation process to ensure that they're prepared for the changing thresholds and to meet the new compliance requirements.
Taxpayers also shouldn't assume that the UK-UK exemption will automatically apply to them. The definition of what's considered to be a material tax advantage will be key.
These measures indicate that HMRC is looking to encourage taxpayers to review their self-certifications and filings, thereby improving their tax governance. The cross-border reporting requirement will focus attention on taxpayers with transfer pricing policies that don't align with their financial results or that jar with their transaction characterisation.
For more insight and guidance, get in touch with our team below.
