What are the UK transfer pricing rules for corporation tax?

Full answer

Transfer pricing is the price charged for goods, services, financing, and intellectual property transferred between associated companies or entities. The UK transfer pricing rules are in Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), based on the OECD arm's-length principle. **Who is covered:** - Transactions between a UK company and an "associated" overseas entity (broadly 25%+ common ownership or control) - From April 2004, domestic UK-to-UK transactions between associated companies are also within scope (though in practice the tax adjustment is symmetric -- if one company is adjusted upward, the other gets a compensating downward adjustment) **The arm's-length principle:** Transactions between associated parties must be priced as if the parties were independent and acting at arm's length in the open market. This applies to: - Goods transferred between group companies - Services provided within the group (management charges, IT, HR, shared services) - Loans and financing (interest rate must reflect an arm's-length commercial rate) - Royalties and IP licensing **Consequences of non-compliance:** If HMRC establishes that a UK company has received less income or paid more expenses than an arm's-length price would dictate, HMRC adjusts the UK company's taxable profits upwards. No corresponding downward adjustment is given to the other party (unless it is in a country with which the UK has a mutual agreement procedure treaty). **Small and medium-sized enterprises (SMEs) exemption:** UK companies that are "small" (fewer than 50 employees and either under £10m turnover or £10m balance sheet) are exempt from the UK domestic transfer pricing rules, unless HMRC issues a notice requiring compliance. "Medium" companies (under 250 employees and under £50m turnover or £43m balance sheet) are also exempt for cross-border transactions where the other party is in a qualifying territory. **Documentation:** Larger groups must maintain contemporaneous transfer pricing documentation. Country-by-country reporting applies to the largest multinationals (global turnover above EUR 750m). **Advance Pricing Agreements (APAs):** HMRC offers bilateral APAs with treaty partners to provide certainty on transfer prices for specific transactions -- particularly useful for complex IP or financing arrangements.

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