The transfer pricing landscape in the United Kingdom has undergone significant changes in recent years, with regulatory changes and evolving compliance requirements reshaping the sector. This article provides an in-depth analysis of the most critical transfer pricing developments in the UK and offers practical advice for businesses operating in this area.
HMRC’s assertive approach and innovative self-assessment programmes:
One of the most significant shifts in the UK transfer pricing landscape has been the increased assertiveness of the HM Revenue & Customs (HMRC). This change has manifested itself in the introduction of innovative self-assessment programmes designed to assess risk among a wider group of taxpayers involved in international related party transactions. Notable examples include the Diverted Profits Tax (DPT) and the Profit Diversion Compliance Facility (PDCF). These initiatives underscore HMRC’s commitment to ensuring that taxpayers properly account for their transfer pricing arrangements and pay the correct amount of tax.
Investment in digital solutions and staff expansion:
In support of its more assertive approach, HMRC has invested heavily in automated digital solutions and expanded its workforce. These investments allow the tax authority to process and analyse vast amounts of data more efficiently, enabling more targeted and accurate risk assessments. As a result, taxpayers are now monitored more and the likelihood of audits has increased.
Reliance on international anti-avoidance frameworks:
As is the case in many jurisdictions, the UK is increasingly relying on international anti-avoidance frameworks to address transfer pricing concerns. Among others, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project, the European Union’s Anti-Tax Avoidance Directive 2 (EU ATAD 2), the International Compliance Assurance Programme (ICAP), and Pillar 2 have all become crucial tools in the UK’s efforts to combat tax avoidance and improve transfer pricing compliance.
New UK TPD Rules and Increased Compliance Burdens:
The introduction of new UK Transfer Pricing Documentation (TPD) rules marks another significant development in the UK transfer pricing landscape. These new rules will increase the compliance burden for large taxpayers and enhance the HMRC’s ability to audit the most material transactions using a risk-weighted audit approach. As a first step, the TPD Master File and Local File (MF+LF) requirements have been implemented for multinational enterprises (MNEs) with consolidated revenue exceeding €750 million. However, smaller taxpayers should also remain vigilant and be prepared to defend their transfer pricing structures.
Practical implications and process improvements:
For businesses operating in the UK, these developments require improvements to internal processes, including audit trails and risk monitoring. To stay ahead of compliance requirements and mitigate tax risks over the next decade, UK taxpayers need to invest in process improvements and automation. This investment will not only help businesses adapt to the changing transfer pricing landscape, but also ensure long-term success and growth.
The UK transfer pricing landscape is evolving rapidly, with increased regulatory scrutiny and the adoption of international anti-avoidance frameworks driving significant change. Businesses operating in this environment must remain agile and invest in process improvements and automation to ensure compliance and mitigate tax risks. By staying informed and adapting to the new landscape, businesses can thrive in the face of these challenges.
Note: This article is an analysis based on a recent webinar held as part of our 10-year anniversary series. If you require more information on any transfer pricing subject or wish to join us in our upcoming webinars, please do not hesitate to contact us.