‹ Back to the articles
The UK has marked a new era of transfer pricing (TP) compliance, introducing regulations and guidance that not only align with the OECD Transfer Pricing Guidelines but also set a higher bar for documentation, governance, and risk management. With HMRC intensifying its scrutiny and shifting the burden of proof onto taxpayers, large businesses operating in the UK must now adopt a more rigorous and evidence-based approach to their transfer pricing policies. These changes, effective for accounting periods beginning on or after 1 April 2023, mark a significant shift in the UK’s TP landscape and demand immediate attention from multinational enterprises and UK-based groups alike.
While the UK’s Local File requirement is rooted in the OECD Transfer Pricing Guidelines, HMRC’s expectations go well beyond the basic international standard. In addition to preparing the standard Master File and Local File, UK taxpayers are now expected to provide more detailed, objective evidence to support their transfer pricing positions. This includes contemporaneous documentation such as functional interviews, board minutes, business plans, and other business records that substantiate the facts and analysis presented in the Local File. The emphasis is on demonstrating not just compliance in form, but also in substance — ensuring that the documentation reflects the commercial reality of UK business.Scope and Applicability: The CbCR Threshold
The new documentation requirements primarily apply to UK entities that are part of an MNE group with global consolidated revenues exceeding the Country-by-Country Reporting (CbCR) threshold of €750 million. For these groups, the obligation to prepare OECD and UK compliant Master and Local Files is now a legal requirement. While entities below the CbCR threshold are not legally required to prepare these files, HMRC strongly encourages all businesses to adopt the OECD standard as best practice, emphasizing the importance of robust documentation for all.
Enhanced Evidence, Governance, and Annual Review: Raising the Bar
A key feature of the new UK TP regime is the focus on robust governance and internal controls. HMRC expects clear evidence of how transfer pricing policies are designed, implemented, and monitored. This means documenting who was involved in the process, how decisions were made, and how policies are kept up to date. For calendar-year-end businesses, the first compliance year is 2024, with transfer pricing documentation required to be prepared contemporaneously and be available by the tax return filing deadline in December 2025. While the documentation does not need to be submitted with the tax return, it must be ready in time to demonstrate compliance if requested. Failing to meet this standard will very likely expose businesses to penalties. Annual reviews of documentation are now the best practice, with businesses required to have clear processes for identifying and recording any material changes in their operations or intercompany arrangements. This proactive approach is intended to ensure that transfer pricing remains aligned with the evolving business environment and that any risks are identified and addressed promptly.
Proactive Documentation: The Presumption of Carelessness and the Burden of Proof
Perhaps the most significant change is HMRC’s new stance on compliance failures. Under the updated regulations, if documentation is found to be inadequate, HMRC will presume carelessness on the part of the taxpayer — potentially triggering substantial penalties and extending the period for which HMRC can make assessments. The burden of proof has shifted: it is now up to the taxpayer to demonstrate that reasonable care has been taken in preparing and maintaining transfer pricing documentation. This makes high-quality, well-evidenced documentation and strong internal processes not just advisable, but essential.
Practical Steps: Conducting a Gap Analysis
Given these heightened expectations, businesses are strongly advised to conduct a gap analysis of their current transfer pricing documentation and transfer pricing compliance processes. This involves reviewing your existing Master File and Local File to identify any areas where they may fall short of both the OECD standards and HMRC’s additional expectations. Conducting a gap analysis identifies areas which will require additional work and ultimately strengthens the robustness and compliance of your documentation, ensuring it is well-prepared to meet HMRC’s expectations. This proactive approach not only supports ongoing compliance but also enhances your ability to withstand HMRC scrutiny and reduce the risk of potential penalties.
Ensuring Readiness: Practical Considerations and Next Steps
The new UK TP regulations signal a clear message: compliance is no longer a box-ticking exercise but a dynamic, evidence-driven process that requires ongoing attention and robust governance. Businesses should prioritize updating their documentation, strengthening internal controls, and embedding regular reviews into their compliance routines. By doing so, they can mitigate the risk of penalties, demonstrate reasonable care, and ensure that their transfer pricing arrangements are both defensible and aligned with evolving regulatory expectations.
Conclusion: Proactive Compliance is the new standard
The new UK transfer pricing regulations signal a significant shift, compelling businesses to go beyond basic OECD compliance and adopt a proactive, evidence-driven approach to transfer pricing management. While adherence to OECD standards remains fundamental for the Local File, HMRC’s heightened expectations for supporting evidence and robust governance distinguish the UK’s requirements. By undertaking a thorough gap analysis and reinforcing internal controls, businesses can ensure their transfer pricing documentation aligns with both the legal requirements and the broader intent of HMRC’s strengthened compliance framework. In this new environment, proactive compliance is not just recommended, it is essential. 
Leave a comment