The UK’s tax authority, HMRC (His Majesty’s Revenue and Customs), has recently released two consultation papers that propose significant reforms to the country’s transfer pricing (TP) regime. These proposed changes, designed to improve compliance and better align the UK with OECD guidelines, could introduce new obligations for medium-sized multinational groups with UK operations.
Here’s what businesses need to understand about the proposed changes:
1. End of the ‘Medium-Sized Enterprise’ Exemption
One of the most impactful changes is the proposal to eliminate the transfer pricing exemption for medium-sized businesses. Currently, businesses that fall under a certain size threshold are exempt from formal transfer pricing rules. Under the new proposals, only small enterprises – defined as those with under £10 million in turnover or balance sheet total, and fewer than 50 employees – will remain exempt.
The important distinction is that these thresholds will apply on a group-wide consolidated basis, rather than at the individual entity level. This means that many mid-sized groups who were previously outside the scope of formal transfer pricing regulations in the UK will now be included. For these businesses, it will be necessary to assess how this change impacts their compliance obligations.
2. Introduction of the International Controlled Transactions Schedule (ICTS)
HMRC is proposing a new International Controlled Transactions Schedule (ICTS). This would require companies to disclose cross-border related party transactions annually. The new reporting thresholds are as follows:
- £1 million aggregate for transactions with qualifying territories
- All transactions with non-qualifying territories
While small businesses will remain exempt, larger in-scope companies will need to adhere to these new administrative reporting requirements. HMRC plans to use this information for risk-based audits, focusing on higher-risk jurisdictions, transactions involving intangible assets, and large value transactions.
3. Other Proposed Changes
The consultation papers also introduce several other notable updates to the UK’s transfer pricing landscape, including:
- UK-to-UK TP Exemption: This exemption would be eliminated, though there will still be carve-outs for tax arbitrage scenarios.
- Alignment with OECD Guidelines: Intangible asset transfers will now need to better align with the arm’s length principle.
- Updated Financial Guarantee Guidelines: HMRC will update its stance on financial guarantees in line with OECD guidance.
- Integration of Diverted Profits Tax (DPT): Under the new regime, the Diverted Profits Tax (DPT) will be integrated into the main corporate tax system under a new label: Unassessed Transfer Pricing Profits (UTPP).
4. Why These Changes Matter
For businesses with UK operations, particularly those previously exempt due to their size, these proposed changes will bring significant changes to transfer pricing policies, documentation requirements, and reporting processes. Groups that are now brought into scope must begin assessing their readiness to comply with these new requirements.
The consultation period is open until July 7, 2025, and businesses that could be impacted should engage with the process and review the proposals in detail. If adopted, these measures will significantly reshape how transfer pricing is monitored and enforced in the UK, potentially increasing compliance burdens for many businesses.
5. How Commenda Can Help
At Commenda, we specialize in transfer pricing solutions that help businesses navigate complex regulations and ensure compliance with both domestic and international standards. If your business may be impacted by these changes, now is the time to assess your current transfer pricing strategy and compliance burden.
Need help evaluating your readiness for these proposed reforms? Let’s have a conversation about how to future-proof your UK transfer pricing strategy and ensure compliance with the evolving regulatory landscape.
Access the full consultation documents here: Consultation 1 | Consultation 2
