One of the questions I’m asked most often is: “Kiran, do the UK transfer pricing rules apply to us?”
As with many things in transfer pricing, the answer is: “It depends”.
Before answering that question, it’s worth taking a step back and understanding what transfer pricing is and why it matters.
What is transfer pricing?
Transfer pricing governs how transactions between companies within the same group are priced for tax purposes. The principle is straightforward: transactions between connected parties should be conducted on arm’s length terms, as though the parties were entirely independent.
This applies to a wide range of arrangements, including management charges, intercompany loans, royalty payments and the sale of goods or services between group companies.
Does UK transfer pricing legislation apply to your businesses?
The UK transfer pricing rules do not apply in the same way to every organisation. Whether your business is affected largely depends on its size and where it sits within a wider group.
1. Large multinational groups (over €750 million consolidated revenue)
For accounting periods beginning on or after 1 April 2023, the UK introduced formalised transfer pricing documentation requirements for groups with consolidated annual revenue exceeding €750 million.
Businesses within scope are expected to prepare and maintain contemporaneous transfer pricing documentation, known as ‘specified transfer pricing records’, comprising:
- a Master File
- a Local File.
These documents should be prepared in line with the OECD Transfer Pricing Guidelines.
In addition, HMRC has also published its Guidelines for Compliance (GfC7), which set out what good transfer pricing documentation looks like in practice. I often recommend that clients read GfC7; not because it’s mandatory, but because it provides one of the clearest insights into what HMRC expects to see.
2. Small and medium-sized enterprises (SMEs)
Most SMEs benefit from a statutory exemption from the UK’s transfer pricing rules, helping to reduce unnecessary compliance costs.
However, the exemption is not absolute. There are important exceptions where the legislation can still apply, and HMRC can require transfer pricing to be applied in certain circumstances.
Even where an exemption is available, businesses should understand their intercompany arrangements and be able to explain how prices have been determined if questions arise.
3. Businesses between the SME threshold and €750 million
I often think of this as the “forgotten middle”.
These businesses aren’t large enough to fall within the formal Master File and Local File requirements, but they’re often too large to benefit from the SME exemption. As a result, transfer pricing is sometimes overlooked altogether.
In reality, while there is no mandatory requirement to prepare a Master File and Local File, the transfer pricing legislation still applies. HMRC expects businesses to maintain sufficient evidence to support their transfer pricing positions and demonstrate that transactions comply with the arm’s length principle.
What level of documentation is required?
Whatever the size of your business, HMRC’s expectation is broadly the same: you should be able to demonstrate that your transfer pricing policies are reasonable, commercially supportable and appropriately documented.
- For the largest multinational groups (i.e., over €750 million consolidated revenue), this means maintaining a Master File and Local File.
- For many other businesses, depending upon size, nature and complexity of the business, proportionate documentation may be sufficient, provided it explains the commercial rationale behind the group’s pricing and can support the position taken if HMRC raises questions.
It doesn’t need to be hundreds of pages. It does need to tell a coherent story about your business, your intercompany arrangements and how you’ve arrived at your intercompany pricing.
I often hear businesses say they’ll prepare the documentation if HMRC ever opens an enquiry. In practice, that’s usually much harder to do. Contemporaneous documentation is often one of the strongest ways of demonstrating that your transfer pricing policies are robust, while trying to recreate the evidence several years later can be far more challenging.
Key takeaway
Effective transfer pricing documentation doesn’t need to be unnecessarily lengthy, complicated or expensive.
If you’ve ever asked yourself, “Do transfer pricing rules apply to us?”, I’d suggest the more useful question is: “What level of documentation is appropriate for our business?”.
Taking the time to answer that question now can help avoid unnecessary cost, disruption and uncertainty later.
A practical approach to transfer pricing
At HaysMac, we help businesses of all sizes prepare practical, proportionate documentation that reflects the complexity of their operations while meeting HMRC’s expectations.
Whether you’re documenting management charges, intercompany financing, royalty arrangements or other related-party transactions, we focus on providing clear, commercially focused advice that supports compliance without creating unnecessary administrative burden.
To discuss your transfer pricing requirements, please get in touch with Kiran Jain, Director, Head of Transfer Pricing.
