Recent developments in transfer pricing in the UK

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 three significant updates that UK businesses need to be aware of; the publication of updated compliance guidelines, HMRC’s 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.

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. In particular, 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

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 in light of 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 Rafaela Oplopoiou-Chapman, or your usual Crowe contact.