On July 19, 2023, the United Kingdom (UK) Government issued the Transfer Pricing Records Regulations (TP Records Regulations). These rules increased the transfer pricing documentation compliance requirements for UK taxpayers and better align with the documentation standards described in the Organization for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 13 report. HM Revenue and Customs (HMRC) has also updated its International Manual with specific guidance at INTM450000.
The TP Records Regulations are effective for corporation tax purposes for accounting periods beginning on or after 1 April 2023, and for Income Tax purposes for 2024-2025 and subsequent tax years. These regulations have brought substantial changes and new compliance requirements for UK companies that are part of multinational enterprises (MNEs). The requirements specifically impact UK businesses with consolidated group revenues exceeding €750 million for the relevant period.
The TP Records Regulations signal the intention of HMRC to enforce higher standards of documentation and compliance more rigorously, with the risk of significant financial penalties for companies who fail to comply. Going forward, it is increasingly crucial for UK companies to ensure that their transfer pricing policies are well implemented, well maintained, and well documented.
Below, we summarize the key changes to be aware of with the TP Records Regulations.
Documentation Requirements: UK companies that satisfy the €750 million materiality threshold are legally mandated to maintain a Master File and a Local File. The Master File provides an overview of the MNE’s global operations, including its business structure, value drivers, and transfer pricing policies. The Local File should supplement the Master File and focus on material intercompany transactions involving the UK taxpayer, as well as provide the supporting transfer pricing analysis for each entity. While the Local File is an entity-specific document and should be prepared on an entity-by-entity basis, HMRC does allow for MNEs to prepare an amalgamated country-specific Local File (UK Local File) if they prefer.
Materiality Considerations: The Local File should include only material categories of controlled transactions. HMRC considers transactions material based on their nature and complexity, rather than just their monetary value. Certain transactions, including those involving intangible assets or profit-split methodologies, are always treated as material. For other categories, a de minimis threshold of £1 million is applied.
Exemptions and Simplifications: Specific transactions can be excluded from the Local File under certain conditions. For example, domestic transactions between related UK taxpayers may be exempt unless they involve patent box elections or are carrying on a ring fence trade. Transactions covered by Advance Pricing Agreements (APAs) made with HMRC before March 31, 2023, are also exempt from documentation requirements. However, HMRC encourages UK taxpayers to maintain proper documentation to support transfer pricing policies, even in cases where exemptions apply.
Penalties for Non-Compliance: HMRC can impose a penalty of up to £3,000 for each failure to keep or preserve the required records. Failure to provide requested transfer pricing records within 30 days can lead to additional penalties. In addition, if a tax return contains an inaccuracy and the required records have not been adequately maintained, careless behavior will be presumed unless the taxpayer can demonstrate they employed reasonable care to avoid the inaccuracy. The behaviors may be considered deliberate if a taxpayer gives a document to HMRC with a known inaccuracy.
Ensuring Compliance with the TP Records Regulations
Amid higher levels of scrutiny and the increased risk of financial penalties, UK taxpayers can take specific steps to ensure that they comply with the TP Records Regulations. These include:
- Conducting regular risk assessments to uncover gaps in records and reporting practices.
- Updating documentation annually to reflect any changes in business operations or market conditions.
- Demonstrating adherence to the OECD’s arm’s length principle by preparing documentation in accordance with the TP Records Regulations, even in cases where the regulations do not apply. The focus on the arm’s length principle and the detailed documentation requirements may necessitate adjustments to the transfer pricing strategies of affected companies.
Compliance with these regulations has created increased administrative burdens for companies, particularly those involved in complex intercompany transactions. The increased requirements for documentation may require additional resources and potentially restructuring existing transfer pricing practices.
Contact GTM for Help
GTM’s transfer pricing team brings extensive expertise and experienced resources whenever and wherever needed. We work side-by-side with tax departments and perform the same day-to-day operational transfer pricing tasks of an in-house transfer pricing specialist but with added benefits including strategic insights, best practices from other leading companies, and the strength of our alliance with WTS Global. Contact us to find out how we can help evaluate your company’s compliance with the UK’s TP Records Regulations and recommend any potential changes to meet the new rules.
