The UK transfer pricing rules aim to ensure that the taxable profits of UK companies, partnerships and branches are not understated as a result of using transfer prices with related parties that are other than the price (known as “the arm’s length price”) that would have applied between unrelated parties, all other factors being the same.
If this test is not met then a transfer pricing adjustment must be made to increase the taxable profits to what they would have been had the arm’s length price been used. In practice, applying this test requires difficult economic analysis, involving hypothesis about what would have happened at arm’s length. Usually, this is highly subjective, so it is as much an art as a science.
HMRC expects UK taxpayers to identify that they are subject to these rules and to document their analysis of why they believe they have complied with the arm’s length test. In addition to a possible transfer pricing adjustment, failure to have appropriate transfer pricing can give rise to penalties, double taxation and the time and cost of a HMRC enquiry.
The rules apply to any transactions, including sales/purchases of goods or services, loans and use of intangible assets. This is an issue affecting any group of companies (or partnerships), particularly where the transactions are cross-border, though domestic transactions cannot be ignored. It also affects UK branches of overseas businesses and overseas branches of UK businesses.
We can carry out analysis to:
- Advise on whether the business qualifies for exemptions for small and medium sized groups
- Advise on appropriate transfer prices which give the most tax-efficient and sustainable position
- Review existing transfer prices for defensibility and for whether a more optimal transfer price is viable
- Create transfer pricing documentation for compliance purposes
- Help with transfer pricing disputes