Transfer pricing – is your business affected?

The 1^st April 2024 was the first anniversary of the UK adopting a standardised approach to transfer pricing documentation. The rules apply for accounting periods beginning on or after 1 April 2023, so companies with a 31 March 2024 year end will need to ensure they comply with the documentation requirements. We have set out the key requirements required to meet your obligations.

What is transfer pricing?

Transfer pricing is the pricing of a transaction between connected parties. In the UK, transfer pricing requirements are based on the ‘arms-length principle’, which aims to determine what the price would be if the transactions were carried out in comparable conditions by independent parties.

Who is affected by transfer pricing?

Broadly, the UK’s transfer pricing rules apply to all businesses unless they fall in the small or medium sized enterprise exemption.

A business is a ‘small’ enterprise’ if it, or the aggregate of the group, has no more than 50 staff and either an annual turnover or balance sheet total of less than €10 million.

A business is a ‘medium sized’ enterprise if it, or the aggregate of the group, has no more than 250 staff and either an annual turnover of less than €50 million or a balance sheet total of less than €43 million.

What is the standardised approach to transfer pricing documentation?

For accounting periods beginning on or after 1 April 2023 multinational enterprises (MNEs) operating in the UK, with worldwide turnover of over €750M, must prepare a master file and local files in accordance with the OECD guidelines. These files don’t have to be submitted to HMRC with the tax return, however MNEs who are now required to prepare transfer pricing documentation in accordance with the OECD guidelines will have 30 days (from a request from HMRC) to provide them on request from HMRC or they may face a penalty of £3,000.

Although enterprises with a worldwide turnover of less than €750m are not required to keep a master or local file in accordance with these rules, if they don’t fall within the small or medium size business exemption they are still required to demonstrate their transfer pricing policies meet the arms-length principle and we strongly recommend master and/or local files are prepared.

The master file should provide a group overview containing information relevant to all group members and the OECD guidance is prescriptive on the content.

A local file must be prepared for each country the MNE operates in and should include detailed information on the transfer pricing policies of the material intragroup transactions relevant to that country. Including:

• Information on the local business activities, organisational structure and competitors
• Detailed transfer pricing analysis of all material intragroup transactions
• Intragroup payments and receipts split by counterparty jurisdiction
• Copies of intragroup agreements
• Copies of relevant transfer pricing rulings (such as an advanced pricing arrangement)
• Local entities financial information

Generally, UK-UK transactions are not required to be included in the local file.

Penalties can be charged for failure to keep the documentation or for a careless or deliberate inaccuracy in the transfer pricing documentation. Failure to keep or produce documentation incurs a penalty of £3,000 whereas a careless or deliberate inaccuracy can cause a tax geared penalty. For the largest businesses, where a failure to keep transfer pricing documentation has led to an error in the self-assessment return, HMRC will presume this to be careless behaviour for the tax geared penalty.

How can we help?

Transfer pricing can be complicated and is being increasingly scrutinised by tax authorities. Businesses should ensure their transfer pricing policies are kept up to date and accurately reflect the value being provided by each party with robust supporting documentation.

If you have any questions, would like support updating your transfer pricing documentation or would like advice on whether your transfer pricing documentation meets the legislative requirements, please contact or Chris Rodgers at chris.rodgers@pkf-francisclark.co.uk or Adam Kefford at adam.kefford@pkf-francisclark.co.uk or call +44 1392 667000.