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Why Transfer Pricing Matters More Than Ever
As global tax transparency tightens, transfer pricing has become a crucial compliance area for UK businesses—whether multinational or not. With strict documentation rules and the risk of penalties increasing, understanding and applying the arm’s length principle is now essential for tax integrity and audit readiness.
What Is Transfer Pricing?
Transfer pricing governs the prices charged between related entities within a corporate group, like a UK company and its overseas subsidiary. These intercompany transactions must reflect the arm’s length principle, the same price that unrelated parties would agree to in an open market.
UK tax law requires businesses to apply this principle and retain evidence to support it, especially when filing their tax returns. This applies to goods, services, loans, intellectual property, and even management charges between connected companies.
New Documentation Rules for Large UK Groups
As of 2025, UK entities within multinational groups with global revenues over €750 million must prepare detailed transfer pricing documentation:
- Master File – A high-level overview of the group’s structure, operations, and global pricing policies.
- Local File – A deep dive into UK-specific related-party transactions, including financial analysis and pricing methods.
These records must be in place before filing the tax return and must be submitted to HMRC within 30 days if requested. Incomplete or missing documentation can result in penalties and a higher risk of audit.
What If You’re Not a Multinational?
Even if you’re not part of a large multinational, UK tax law still expects businesses to keep proper records that prove their intercompany transactions are priced fairly.
The best practice? Prepare documentation using the same Master File and Local File format, aligned with international guidelines. It shows due diligence and can protect against penalties if your transfer pricing comes under review.
Do SMEs Get an Exemption?
Yes—but with limits.
Small and medium-sized enterprises (SMEs) are generally exempt from the UK’s transfer pricing documentation rules. However, this exemption doesn’t apply if:
- You’re dealing with a country that lacks a double tax treaty with the UK.
- The transaction is linked to a Patent Box claim.
- HMRC issues a specific notice removing the exemption.
Also, proposed reforms could remove the exemption for medium-sized businesses, so keeping documentation may become mandatory in the near future.
What’s Coming Next? Reform & ICTS
Starting in 2026, the UK will introduce the International Controlled Transactions Schedule (ICTS), requiring businesses to disclose detailed information about cross-border transactions with related parties when filing tax returns. This move aims to improve transparency and compliance in international business dealings.
Summary: How to Stay Compliant
- Know your risk – Are you part of a large multinational or trading cross-border?
- Apply the arm’s length principle – Price transactions as if dealing with an unrelated party.
- Document everything – Use the Master File and Local File approach, even if not mandatory.
- Review annually – Update financials, comparables, and business functions each year.
- Monitor reforms – Prepare for changes to SME exemptions and new reporting rules like ICTS.
Prepare Now, Avoid Problems Later
Transfer pricing compliance isn’t just about paperwork—it’s about reducing tax risk, improving audit readiness, and showing HMRC that your business takes cross-border transparency seriously.