HMRC’s major changes to UK transfer pricing rules for medium-sized businesses

Small and medium sized enterprises are now generally exempted from the UK’s transfer pricing rules as set out at Section 166 TIOPA. In order to protect the UK tax base and given a significant number of medium sized enterprises in the UK, the government is proposing to remove the medium-sized enterprise exemption (whilst the exemption for small enterprises will be retained). As a result, medium sized enterprises will be within the TP regime in the UK.

The threshold for the new exemption will be for companies with maximum 50 employees, or £10 million of turnover or £10 million of balance sheet total. Important point to note here is these thresholds are based on consolidated group numbers, not just the individual UK entity.

UK-UK transactions will be out of the TP regime (with some exceptions, e.g. if a counterparty has a different tax rate or can have tax arbitrage, etc.).

The government is considering the introduction of a requirement for in-scope businesses to annually report information about certain cross-border related party transactions to HMRC. The proposed scope includes dealings between a UK-resident company and its overseas PEs, and dealings of UK PEs of foreign-resident companies.

In addition, an updated draft legislation of UK Transfer Pricing, Permanent Establishment and Diverted Profits Tax was released yesterday. The highlights are: (i) aligning valuation of cross border intangible assets transfers with the arm’s length price, (ii) replacing Diverted Profits Tax (‘DPT’) with an Unassessed Transfer Pricing Profits (‘UTPP’), and (iii) alignment of implicit support and guarantees with Chapter X of the OECD TP Guidelines.

Overall these changes, especially the first one, will potentially lead to a profound shift of the transfer pricing landscape in UK as a significant number of businesses will come under the TP regime.