CMS Expert Guide to Transfer Pricing Documentation in United Kingdom

Yes. Under general record-keeping obligations imposed by Corporation Tax Self Assessment, records must be kept in a way enabling a taxpayer to deliver correct and complete tax returns within 12 months of the relevant year end, including any adjustments to their commercial profits that arise where the provision between two connected persons differs from an arm’s length provision, and profits used to calculate UK tax are reduced or losses increased as a result of that provision. 

UK transfer pricing legislation provides for certain exemptions for enterprises that are defined under EU rules (as slightly modified for this purpose) as small and medium-sized. Where the enterprise is part of a group or association, the limits apply to that group. The criteria, tested on the basis of the whole consolidated group, are: 

Small Enterprise 

• Staff: fewer than 50 
• And less than one of the following limits: 
• Annual turnover: EUR 10 million 
• Gross assets: EUR 10 million 

Medium Enterprise 

• Staff: fewer than 250 
• And less than one of the following limits: 
• Annual turnover: EUR 50 million 
• Gross assets: EUR 43 million 

Whether an enterprise is treated as small or medium-sized for this purpose is determined by reference to the accounting period for which a return is being made and a company will cease to be so treated in the first period in which it breaches the relevant limits.  

If the UK company is within a group that qualifies as small, it is exempt from the need to apply and document arm‘s length prices for transactions with related parties in countries with which the UK has a double tax treaty including an appropriate non-discrimination article. If the UK company is within a group that qualifies as medium-sized, the UK company need not apply arm‘s length transfer pricing unless it is dealing with related parties in territories without a qualifying double-tax treaty (as for ‘small’ groups above). However, HM Revenue and Customs (HMRC) can subsequently require a medium-sized group to apply arm‘s length transfer pricing to any of its related party transactions during a given chargeable period.  For this reason, medium-sized groups would normally be well advised to have appropriate transfer pricing policies in place. 

Furthermore, there are now specific rules for UK entities that are members of a multinational group within the country-by-country reporting regime, whereby they are now required to prepare both ‘local’ and ‘master’ files. These files are intended to document the transfer pricing position taken by the entities. The format for these files is set out in the OECD Transfer Pricing Guidelines (approved on 20 January 2022), and these rules take effect for accounting periods beginning on or after 1 April 2023.  

2.1  Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)? 

Any provision between ‘connected persons’ must be documented. The definition of ‘provision’ is broad, and represents a transaction or series of transactions including arrangements, understandings and mutual practices whether or not they are, or are intended to be, legally enforceable. 

2.2 What is the definition of “associated enterprises” for the purposes of this requirement (in particular, are transactions between a permanent establishment and its head office in the scope of the documentation requirement)? 

‘Connected persons’ are where one party controls the other, or where parties are under common control, with control generally meaning the power to secure by the means of holding of shares or the possession of voting or other powers that the affairs of a company are conducted in accordance with the wishes of the person tested. A 40% participant in a joint venture is also deemed to control that joint venture, a joint venture for these purposes being a company or partnership, which is controlled by two persons, each of whom has at least a 40% interest in the venture. 

Under UK rules, the ‘separate enterprise principle’ applies when determining the chargeable profits of a UK permanent establishment, and therefore the arm’s length principle and the transfer pricing documentation requirements explained in the OECD transfer pricing guidelines will apply. 

2.3  For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD? 

HMRC will accept documentation prepared in accordance with EU TPD guidelines. It is recommended that taxpayers which intend to explicitly follow the EU TPD Code of Conduct in relation to local documentation advise HMRC of this in writing. 

2.4  For all countries (and, in particular, OECD countries), is the content of the documentation similar to that described in the revisions to chapter V of the OECD transfer pricing guidelines (final report on Action 13 of the BEPS project)? If not, are taxpayers entitled to choose between the local requirements and the OECD approach? 

Yes, the requirements largely align the UK position with the BEPS Action 13 final report. The BEPS Action 13 report sets out the standardised approach for transfer pricing documentation, being the master file and local file as well as the country-by-country report (see below in this respect). The local file contains the detailed transfer pricing documentation for a specific jurisdiction and identifies the material related to party transactions, the amounts involved and the company’s transfer pricing analysis of those relevant transactions. The master file is a high-level overview of the group’s global business operations and transfer-pricing policies.  

2.5 Do taxpayers which are not established in United Kingdom need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer United Kingdom to provide information which is located in another state? 

Yes, to the extent that the foreign taxpayer is a counterparty to a transaction involving a UK legal entity, information relating to the foreign taxpayer may be requested from the UK party to substantiate the pricing of that transaction for UK tax purposes. 

2.6 If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)? 

HMRC has confirmed in published guidance that comparable studies from outside the UK (e.g. pan-European benchmark studies) will not automatically be rejected just because they are non-domestic. Instead, HMRC will consider the reliability of such studies on a case-by-case basis. 

2.7  If comparable studies are to be provided in general, are safe harbours/specific circumstances exempting taxpayers from preparing benchmark studies (such as the EU Joint Transfer Pricing Forum guidelines on low value adding services or revisions to chapter VII of the OECD transfer pricing guidelines about low value adding intragroup services) in your jurisdiction or are there situations in which tax authorities do not request benchmark studies? If so, in which circumstances taxpayers are exempted from benchmark studies? 

The UK, by virtue of it having adopted the revised OECD Transfer Pricing Guidelines, accepts the proposals on low value adding services in chapter VII of those guidelines. HMRC also accept the findings of the EU Joint Transfer Pricing Forum guidelines on low value-added services. 

In addition, in its International Manual, HMRC state that it does not want businesses to suffer disproportionate compliance costs. Hence, taxpayers should prepare and keep such documentation as is reasonable given the nature, size and complexity of their business or of the relevant transaction (or series of transactions), but which adequately demonstrates that the taxpayer’s transfer pricing meets the arm’s length standard. 

2.8 What language(s) are to be used by taxpayers in submitting the transfer pricing documentation? 

English. 

Transfer pricing documentation must be provided to the tax authorities upon request. This may be an informal request. Alternatively, HMRC can use formal information powers to obtain the documentation. Information notices requesting the specified transfer pricing records cannot be appealed and compliance within a reasonable period, normally 30 days, is required.  

Failure to comply with an information notice could result in an initial penalty of GBP 300 and daily penalties thereafter (up to GBP 60 a day). HMRC can issue a notice following the filing date of the relevant tax return and will expect a response within 30 days. Furthermore, there is a requirement to keep and preserve transfer pricing records. A penalty of up to GBP 3,000 can be charged for each failure to keep or preserve the required transfer-pricing records.  

Penalties may also be raised: 

1.  If an incorrect return is made and a business has been careless or negligent in establishing the arm’s length basis for the return; or 
2.  If a business does not maintain the appropriate documentation necessary to demonstrate that it has made its returns on the basis that the terms of connected-party transactions were considered to be on arm’s length terms. 

These penalties fall within general provisions relating to incorrect corporation tax returns, namely that a transfer pricing adjustment may lead to a maximum 100% penalty based on the potential tax lost, the rate of the penalty being dependent on the behaviour that gave rise to the understatement. Penalties are up to 30% for negligence or carelessness, up to 70% for deliberate inaccuracies, and up to 100% for deliberate inaccuracies aggravated by concealment. A fixed penalty of GBP 3,000 can be levied in respect of a failure to keep records. Under the new measures, it is also worth noting that where an inaccuracy is found in a tax return for transfer pricing and the entity has not kept the relevant transfer pricing records, carelessness will be presumed unless the entity can prove reasonable care was taken. Therefore, the risk of a tax penalty is now heightened. 

See above regarding the presumption of carelessness where an entity has not preserved the relevant transfer-pricing records and an inaccuracy in a tax return is found.  

 No. 

 No.

Yes, regulations implementing CbCR were passed on 26 February 2016 and have been in effect since 18 March 2016. 

The reporting obligation relates to accounting periods beginning on or after 1 January 2016 or accounting periods ending on or after 31 December 2015. Companies will have 12 months from the end of the relevant accounting period in which to file a report with HMRC. 

A UK resident parent company of a multinational enterprise (MNE) with a consolidated group turnover of GBP 750 million or more must file a CbCR. The measure also includes a requirement for the top UK entity of an MNE to file a CbCR when it is not the ultimate parent entity of the MNE and the ultimate parent entity is resident in a country that either does not require CbCR or does not exchange reports with HMRC in accordance with an effective multilateral competent authority agreement. There is an exemption if the results the UK entity would be required to file have already been included in a CbCR that HMRC can receive. Voluntary reporting is also possible. 

 Yes. 

A MNE that does not file a CbCR on time is liable for a fine of GBP 300. HMRC may also charge an additional penalty of GBP 60 per day if the CbCR is not filed after the MNE has been notified of the penalty. If no CbCR is filed within 30 days of the issuance of a penalty, HMRC may apply to the tax tribunal to give an order for an increased daily penalty, which the tax tribunal may in their discretion increase up to a maximum of GBP 1,000 per day. Any entity under an obligation to file a UK CbCR can suffer a penalty for late filing. In addition to penalties for late filing, a penalty of up to GBP 3,000 may be charged if inaccurate information is carelessly or deliberately provided to HMRC. 

On 27 January 2016, the UK and 30 other countries signed the Multilateral Competent Authority Agreement for the automatic exchange of country-by-country reports (CbC MCAA). This agreement sets out the rules and procedures for tax authorities, including HMRC, to exchange automatically CbCRs, prepared by the reporting entity of a multinational enterprise and filed with the tax authority of that entity’s jurisdiction of tax residence with the tax authorities of all jurisdictions in which the MNE operates. The first exchanges started in 2017–18 for 2016 information. Countries not covered by the CbC MCAA may participate either through double-tax conventions or tax information exchange agreements. The UK has a large number of tax treaties with suitable information exchange provisions, as well as information exchange agreements which enable the communication of CbCR with other countries. 

There are anti-avoidance measures in place in the UK targeting arrangements for avoiding an obligation under CbCR regulations, the effect of which is that those arrangements are to be disregarded. 

No. 

Not applicable. 

Not applicable. 

Not applicable. 

Not applicable. 

Not applicable.