HMRC’s consultation on transfer pricing: what you need to know

At the end of April, HMRC launched a series of consultations as part of its spring tax update. See our blog for more information. One of those consultations proposes significant changes to the UK’s transfer pricing legislation. The consultation, open until 7 July 2025, seeks stakeholder views on two key proposals to strengthen the UK’s ability to counter profit shifting, enhance transparency and align with international tax standards.

What are the UK’s transfer pricing rules?

If your business falls within scope of the UK transfer pricing rules, you must follow specific compliance requirements. All transactions with associated companies, whether in the UK or overseas, must comply with the “arm’s length principle”.  This means the transaction should be priced at an amount agreed between independent parties under comparable conditions.

Proposed changes

1. Reform of the small and medium business transfer exemption

Currently, in most cases, small and medium-sized enterprises (SMEs) are exempt from the transfer pricing rules. HMRC proposes to narrow the scope of the current SME exemption, limiting it to businesses that meet a refined definition of “small”.  Small companies have 50 or less staff and either an annual turnover or balance sheet total of under €10m. The thresholds are applied on a group wide basis, taking into account partner and linked enterprises.

The aim of this proposal is to better protect the UK tax base and make the exemption narrower and easier to apply. It also more closely aligns the UK with most other countries which do not have an exemption for small and medium sized businesses.

Additional reporting of cross-border related party transactions

2. Additional reporting of cross-border related party transactions

HMRC is proposing a new reporting requirement for multinational enterprises. This would require disclosure of cross-border related-party transactions to HMRC through an international controlled transactions schedule (ICTS). Companies must disclose all overseas transactions over £100k unless the company’s total aggregated foreign related party transactions are under £1m. The level of detail proposed to be disclosed is significant and for each transaction includes jurisdiction of the counterparty, transfer pricing methodology, profit level indicator mark up and total value.

HMRC have said the ICTS would provide earlier visibility of transactions in scope of the transfer pricing rules and enable more effective risk assessment and enforcement.

These proposals reflect the broader international trends toward greater transparency and increased compliance activity. They are consistent with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the implementation of pillar two global minimum tax rules.

Implications of the proposed SME exemption reform

The proposed amendment to the scope of the SME exemption would bring medium-sized businesses (generally, businesses with over €10m turnover but below €50m) within the scope of transfer pricing rules for the first time.

This change is expected to increase compliance costs and place additional administrative burdens on businesses newly brought into scope. Businesses already subject to transfer pricing obligations in other jurisdictions, may face a limited burden as much of the required documentation may already be in place.

Implications of the proposed ICTS

The introduction of the ICTS would represent a significant new annual compliance obligation for multinational groups. This is likely to result in higher compliance costs. Although there is a proposed £1m de minimis for aggregated foreign transactions this is a relatively low bar.

If HMRC use the data properly there is a potential benefit that more substantial data reporting, would reduce the risk of a time and resource intensive transfer pricing enquiry for low-risk transactions. However, it is also clear that HMRC plan to use this information to assess transfer pricing risk in businesses which are not already subject to country-by-country reporting i.e. have consolidated turnover of under €750m.

Given HMRC’s increasing tendency to run volume compliance campaigns, there is a growing risk to businesses. Data provided by the ICTS will be used to inform a volume approach to transfer pricing compliance. Transfer pricing is complex and subjective with no one correct answer. Therefore running mass enquiries could significantly increase costs as businesses defend their policies and engage with HMR

How can businesses plan for transfer pricing changes?

It is increasingly important to have an up-to-date understanding of the current transactions and existing policies in your business. This helps you stay best prepared to meet any new potential obligations that may arise.

For businesses which are already within the transfer pricing rules, we recommend reviewing and updating any existing transfer pricing documentation.

For businesses which currently benefit from the SME exemption, you should review any existing related party transactions. We’d also recommend you familiarise yourselves with the transfer pricing rules and documentation requirements.