Transfer pricing basics

As businesses grow, so does the complexity of their tax obligations. For companies operating internationally, or as part of a wider multinational group, transfer pricing is an area which should not be overlooked.

Transfer pricing rules are designed to ensure that transactions between connected businesses are priced appropriately, to ensure profits are not shifted to low tax jurisdictions. While many businesses associate transfer pricing with large multinational corporations, it can affect a much wider range of organisations.

With HMRC increasing its focus on transfer pricing compliance, documentation, and international tax transparency, understanding the basics can help businesses reduce risk, avoid costly disputes, and meet their obligations.

What is transfer pricing?

Transfer pricing refers to the prices charged for transactions between connected companies.

These transactions can include:

• Sales of goods between group companies
• Management and administrative services
• Intercompany loans and financing arrangements
• Intellectual property licensing
• Shared staff, resources, or facilities

The UK applies the internationally recognised “arm’s length principle”, which requires that transactions between connected parties should be priced the same as those that would have been agreed between independent businesses acting in their own commercial interests.

For example, if a UK company provides management services to an overseas subsidiary, HMRC would generally expect the fee charged to reflect the amount an unrelated third party would pay for the same service.

The aim is to ensure profits are taxed where economic activity and value creation takes place, rather than being artificially shifted between jurisdictions through non-commercial pricing arrangements.

Why does transfer pricing matter?

Transfer pricing is an area of increasing focus for tax authorities worldwide.

If HMRC considers that transactions between connected parties have not been priced correctly, it can adjust a company’s taxable profits. This may result in:

• Additional corporation tax liabilities
• Interest on underpaid tax
• Double taxation
• Potential penalties
• Increased scrutiny from HMRC

Getting transfer pricing right can help businesses minimise tax risk and avoid lengthy enquiries.

Does transfer pricing apply to my business?

Many businesses are surprised to learn that transfer pricing is not just an issue for large multinational enterprises.

In the UK, businesses that do not qualify for the small and medium-sized enterprise (SME) exemption are generally within the scope of the transfer pricing rules.The SME exemption broadly applies where a business, together with any linked or partner enterprises, has:

• Fewer than 250 employees, and
• Annual turnover of no more than €50 million, or gross assets of no more than €43 million.

When assessing whether the exemption applies, businesses must consider the size of the wider group, not just the UK entity.

However, many other countries do not operate a SME exemption for transfer pricing. This means even where an entity is exempt from transfer pricing in the UK transactions with overseas connected companies may still fall into scope of the transfer pricing rules in the foreign jurisdiction.

As a result, transfer pricing must still be considered by the majority of businesses transacting with

When should businesses review their transfer pricing?

Transfer pricing should be considered whenever connected parties transact with one another and should continually be reviewed as business arrangements evolve. However, with the upcoming introduction of the International Controlled Transactions Schedule, a new reporting framework for transfer pricing, it is more important than ever that businesses review their transfer pricing arrangements and ensure appropriate policies are in place.

Common situations that may require transfer pricing consideration include:

• Expanding into new countries
• Establishing or acquiring overseas subsidiaries
• Introducing intercompany loans
• Charging management fees between group companies
• Licensing intellectual property, trademarks, or software
• Centralising management or support functions
• Undertaking a group restructuring
• Entering into significant new related-party transactions

These changes can affect where value is created within a group and whether pricing arrangements remain appropriate.

What records do businesses need to keep?

Businesses within the scope of transfer pricing rules should maintain sufficient records to demonstrate that their pricing is consistent with the arm’s length principle.

The level of documentation required will depend on the size and complexity of the business and its transactions. In many cases, businesses will need to benchmark their pricing against comparable third-party transactions to support their position.

For multinational groups with annual consolidated revenues exceeding €750 million, more extensive documentation requirements may apply, including:

• Master File – A high-level overview of the group’s structure, business activities, intellectual property, financing arrangements, and transfer pricing policies.
• Local File – Documentation covering the UK entity’s specific transactions with connected parties, including how pricing has been determined and supporting financial information.

Even where formal documentation requirements do not apply, businesses should still retain sufficient evidence to support their transfer pricing position. HMRC can request this information as part of an enquiry.

What should businesses do now?

Rather than waiting for a HMRC enquiry or the introduction of the ICTS, businesses should take a proactive approach by:

• Identifying transactions with connected parties
• Reviewing how those transactions are priced
• Assessing whether the SME exemption applies
• Considering whether existing documentation is sufficient
• Monitoring arrangements as the business grows

Acting early can help identify risks before they lead to costly adjustments or disputes.

How we can help

Whether you are expanding overseas, reviewing existing intercompany arrangements, or responding to HMRC enquiries, our transfer pricing specialists can help.

We can assist with:

• Transfer pricing risk reviews
• Pricing policies for intercompany transactions
• Preparation of transfer pricing documentation
• Master File and Local File compliance
• HMRC enquiries and dispute resolution

Our team works with businesses ranging from growing owner-managed groups to large multinational enterprises, helping them manage risk, meet compliance obligations, and implement practical transfer pricing policies that support their commercial objectives.