Recent developments in transfer pricing in the UK
Consultations, Compliance, and Risk Management
Transfer pricing remains a key focus for multinational enterprises (MNEs) operating in the UK, particularly as international tax rules continue to evolve. Recent developments in the UK on transfer pricing guidance, risk management, and dispute resolution mechanisms have important implications for businesses.
Below we have outlined some significant Transfer Pricing updates that UK businesses need to be aware of: two new consultations, the publication of updated compliance guidelines, HMRC risk-based approach to transfer pricing, and the growing role of Advanced Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs) in resolving international tax disputes.
UK transfer pricing consultations 2025
In April 2025, HMRC published draft legislation proposing significant reforms to the UK’s transfer pricing, permanent establishment (PE), and diverted profits tax (DPT) frameworks. These reforms aim to modernise and simplify the UK’s international tax rules, aligning them more closely with the OECD Transfer Pricing Guidelines and the UK's obligations under its income tax treaties.
Separately, HMRC are also consulting on two proposed changes to protect the UK’s tax base against cross-border profit diversion: amending the current exemption for small and medium-sized entities and introducing a new reporting requirement for cross-border related party transactions.
These consultations reflect the UK government’s commitment to a fair, transparent, and efficient tax system while supporting compliance and reducing disputes. The consultations have now closed, and we are eagerly waiting to find out what the legislative changes will be.
Key proposals and their business implications
The current exemption from transfer pricing rules for medium-sized businesses would be removed, applying transfer pricing rules to a wider range of businesses. The exemption for small businesses is intended to remain.
Additionally, the government is inviting feedback on a proposal to adjust the small enterprise threshold (turnover or balance sheet total) from €10 million to £10 million, which would create a clearer and more relevant benchmark for UK businesses.
Business impact:
Medium-sized enterprises that previously did not have to comply with transfer pricing rules may now face new documentation, compliance, and reporting requirements, increasing administrative costs.
Given that an enterprise only needs to have more than 50 employees to fall into the medium or larger category (and that this limit will generally apply to the whole corporate group, not just their UK presence), this could result in a lot more businesses having to apply these rules.
Certain intra-group transactions between UK-resident companies may be exempt from transfer pricing rules if they present no risk of tax loss. This exemption is intended to reduce the compliance burden for straightforward domestic transactions.
Business impact:
UK-based groups will benefit from lower compliance requirements and reduced documentation for intra-UK transactions, enabling them to focus transfer pricing resources on cross-border and higher-risk dealings.
This will be a welcome relaxation of the rules for many businesses. However, the exemption comes with a lot of caveats and exclusions. Should HMRC issue the companies with a notice disapplying the exemption, it will be on the companies to demonstrate that there is no loss of tax. Care may need to be taken on the transition to these rules.
The consultation clarifies and reinforces the participation condition — a requirement that transfer pricing rules (and certain exemptions) only apply if a minimum ownership/control threshold is met, typically 25% or more direct or indirect ownership. A new condition will give rise to participation where the ownership/control threshold is not technically met, but there is nevertheless an ‘agreement for common management’, whether this is formal and legally enforceable or not. The rules also clarify how to calculate and evidence ownership interests.
Business impact:
Companies must carefully assess and document ownership structures to confirm if the participation condition applies. This ensures appropriate application of transfer pricing rules and exemptions. Complex group structures may require more detailed analysis to determine which transactions are in scope, potentially increasing compliance efforts but reducing ambiguity and disputes.
It is worth noting that a new anti-avoidance rule will allow HMRC to disregard any ownership arrangements which exist mainly to ensure that the participation condition is not met. In addition, HMRC will be able to issue a notice that forces the taxpayer to act as though the participation condition is met, even if it strictly isn’t. This will allow them to rely on the OECD meanings and terms, rather than those in the UK legislation. Use of these powers could result in more, rather than less, ambiguity for complex ownership structures – although HMRC claim this will only be used rarely.
Cross-border transfers of intangible assets between related parties must be valued according to the arm’s length principle, consistent with OECD guidance, ensuring fair and consistent valuation of intellectual property and other intangibles.
Business impact:
Multinational groups will need to use robust valuation methods and maintain comprehensive documentation to support intangible asset pricing, potentially increasing upfront costs but reducing the risk of HMRC challenges. Advance Pricing Agreements will now be available to fully cover cross-border transactions relating to intangibles.
UK transfer pricing rules will be aligned more closely with OECD guidance on financial transactions, including the tax treatment of loans, guarantees, derivatives, and other financial instruments.
Business impact:
Companies engaging in intra-group financing and financial instruments could benefit from greater clarity and consistency in tax treatment, though they should prepare for enhanced documentation and justification of arm’s length terms.
The tax treatment of CCAs has recently been updated and is no longer under active consultation. HMRC now provides certainty through unilateral APAs, which help clarify how shared costs and benefits under CCAs are recognised for tax purposes.
Business impact:
Companies involved in CCAs could reduce audit risk and gain upfront clarity through APAs, though applying for these agreements requires investment in time and resources.
HMRC continues to pursue a more data-driven approach in its transfer pricing (TP) compliance and risk assessment processes, proposing the introduction of new documentation requirements through the ICTS. Under this proposal, businesses within scope would be required to submit detailed information on certain cross-border related-party transactions to HMRC via the ICTS, which aims to collect objective data in a structured and standardised format.
HMRC intends to utilise this data to enhance the accuracy and efficiency of identifying TP and permanent establishment (PE) risks, enabling the authority to prioritise its resources towards cases where transfer pricing adjustments may be necessary.
The ICTS would apply to all entities with material cross-border transactions exceeding a total aggregated value of £1 million. This includes UK entities subject to UK transfer pricing legislation, UK permanent establishments of non-resident entities, and UK entities with foreign permanent establishments. Additionally, the scope of the ICTS would be aligned with any revisions to the SME exemption discussed earlier in the consultation. This means that small entities would be exempt, but medium entities would not (and there would be no size-based exemption where PEs are involved).
Business impact:
Businesses with cross-border related-party transactions above the £1 million threshold could face new mandatory reporting obligations. This means additional data collection, validation, and submission efforts. The administrative burden will depend on the level of detail, permitted aggregation, and additional visibility HMRC want over financing transactions, which all remain to be decided.
Publication of HMRC’s transfer pricing compliance guidelines
HMRC’s latest publication, help with common risks in transfer pricing approaches, aims to guide businesses in navigating the most common transfer pricing risks. This publication provides useful insights into what HMRC looks for in transfer pricing arrangements and how businesses can ensure compliance with UK tax laws.
This guidance offers an in-depth look at key technical and policy areas in transfer pricing that HMRC has recently highlighted during inquiries and other engagements with businesses. It also explores aspects related to the planning and execution of compliance procedures, as well as the necessary level of analysis and supporting documentation.
The document outlines several key risks that businesses often face
- Inadequate documentation: HMRC stresses the importance of having clear and comprehensive documentation to support transfer pricing decisions. Failure to maintain sufficient documentation can lead to tax adjustments and penalties.
- Misapplication of transfer pricing methods: Businesses are reminded to apply appropriate transfer pricing methods based on the specific facts and circumstances of their transactions. Using methods that don’t reflect the economic substance of a transaction could be problematic.
- Failure to review transfer pricing arrangements frequently: HMRC highlights the importance of revisiting transfer pricing policies periodically, especially when there are changes in market conditions or a group restructure.
For businesses in the UK, these guidelines present a good opportunity to review and refine their transfer pricing practices, ensuring they meet HMRC’s expectations and avoid unnecessary compliance issues. Businesses are advised to focus on transparency and regular updates to their documentation to stay on top of potential risks.
HMRC’s risk focus: Managing transfer pricing risks
HMRC has also provided further details on its risk-based approach to transfer pricing assessments in its internal manual, INTM485025.
This manual is crucial for understanding how HMRC evaluates the economic substance of transfer pricing arrangements and the types of transactions it considers high-risk.
The manual discusses the need for a detailed analysis of how economically significant risks are controlled when creating and documenting transfer pricing policies. It stresses that when contractual risk allocation aligns with the properly defined transaction, all contributions to managing these risks should be priced and can be involved in both the potential gains and losses resulting from those risks.
A few key points on HMRC’s risk focus
- Economic substance is important: HMRC is increasingly focused on whether the transfer pricing arrangements reflect the actual business activity. Simply structuring transactions to achieve a tax advantage is unlikely to be acceptable.
- Risk categories: HMRC assesses transfer pricing risks by categorising businesses according to their risk profiles. Businesses involved in higher-risk sectors or jurisdictions may face more scrutiny.
- Proactive engagement: Businesses are encouraged to engage with HMRC early if they suspect any risks or discrepancies in their transfer pricing practices. This proactive approach can help avoid lengthy and costly audits or disputes.
Businesses need to ensure that their transfer pricing methods accurately reflect the commercial reality of their operations, not just the tax implications. Regular reviews of existing arrangements and transparent communication with HMRC can significantly reduce the risk of a tax dispute.
APA and MAP: Insights from OECD Statistics
As international tax rules become more complex, HMRC’s APA and MAP published statistics show a growing trend of businesses using APA and MAPs to manage their transfer pricing risks. These mechanisms allow businesses to resolve disputes with tax authorities before they escalate, providing greater certainty in their cross-border transactions.
Recent statistics indicate
- Transfer pricing yield: The yield from transfer pricing enquiries, APAs, and MAPs reached £1.786 billion in 2023-24, up from £1.635 billion in 2022-23.
- APAs and ATCAs: The APA programme saw an increase in the time to reach agreements, from 45.5 months to 53 months, with 27 APAs concluded in 2023-24, up from 15. The number of ATCAs agreed has fluctuated over the years, with 10 agreements in 2023-24, up from five in 2022-23. More APAs and Advance Thin Capitalisation Agreements (ATCAs) have been resolved over the past year, which is quite promising, even if they take longer to resolve.
- Efficiency of MAP: The MAP, which resolves disputes between tax authorities in different countries, has become an increasingly efficient process. The latest OECD statistics show a reduction in the average time it takes to resolve MAP cases, offering businesses faster resolutions to cross-border tax issues. New transfer pricing cases have dropped to their lowest levels since 2019. This reflects the good work tax authorities have been doing to engage taxpayers, even if they seem less inclined to make new MAP applications. The data shows that the UK is one of the most effective tax authorities in reducing its overall case inventory.
With HMRC’s focus on transfer pricing, multinationals can expect more rigorous scrutiny of their tax arrangements. This means companies need to ensure their transfer pricing policies are robust and well-documented.
For UK businesses, engaging with HMRC and other tax authorities through APAs and MAPs offers a strategic way to avoid double taxation and resolve transfer pricing disputes quickly. These tools are becoming more essential in managing international operations smoothly, particularly considering ongoing changes to global tax regulations.
What actions should UK businesses take?
For UK businesses, the following actions should be considered:
- evaluate the current compliance processes and the thoroughness of transfer pricing documentation in the UK
- examine the transfer pricing policy risks and provide appropriate supporting analysis
- review ongoing transfer pricing enquiries and existing policy designs to spot potential risk indicators as outlined by HMRC.
Conclusion
Recent developments in the UK’s approach to transfer pricing highlight the importance of staying on top of evolving tax regulations. By actively managing transfer pricing risks, maintaining comprehensive documentation, and using dispute resolution mechanisms, businesses can safeguard themselves against tax audits and disputes while ensuring compliance with UK tax law.
If you would like further help and assistance for your business, please contact your usual Crowe contact.
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