Standard requirements

In the UK, the transfer pricing documentation obligations are dependent on the size of the Group. All documentation must be prepared in English.

For accounting periods commencing on or after 1 April 2023, if a Group has over €750 million in revenue, it is considered “large” and will have to produce documentation meeting OECD standards:

• Local File;
• Master File; and
• CbC report.

HMRC had intended to include a Summary Audit Trail (SAT) document amongst these obligations, however this is currently suspended, nevertheless HMRC has received approvals that would allow for the rapid implementation of the SAT, so this is something to keep an eye on going forwards.

Smaller Groups must consider whether they meet the SME criteria, which will provide them with an exemption from formal documentation requirements (under most circumstances). The criteria, applicable to the fiscal year in question, are as follows:

• 250 employees or less; and
• Neither revenue exceeds €50 million nor total assets exceed €43 million.

The formal documentation requirements for Groups exceeding the SME requirements are not specified although it is usually considered best-practice for Groups that exceed the SME exemption but do not meet the large definition to prepare a report that follows the guidelines of an OECD Local File. There are also various exceptions to the SME exemption as well as the profit fragmentation rules to consider.

Exceptions to the SME Exemption

There are various exceptions where a UK business will be obligated to prepare UK Transfer Pricing documentation despite not exceeding the SME criteria:

• HMRC issues a notice related to a transaction subject to a Patent Box claim;
• HMRC can provide a notice to medium-sized Group (over 50 employees and one of i) revenue greater than €10m or ii) total assets greater than €10m);
• Transactions with Group entities located in jurisdictions where the UK does not have a double tax treaty.

Profit Fragmentation Rules

Profit fragmentation rules can effectively be used to bring Groups using the SME exemption into the scope of Transfer Pricing regulations and we recommend that any taxpayer that has a transaction which meets the below conditions assess their TP documentation needs:

• There is a transfer of value derived from a UK resident party to an overseas party; and
• The profit allocated to the entity in the low tax jurisdiction is excessive in relation to the arm’s length principle; and
• The tax payable overseas is less than 80% of what the UK tax would have been; and
• The proprietor of the business (sole trader, shareholder, partner) has the ‘power to enjoy’ the transferred profits.

It should be noted that the impact of reliefs such as those from R&D or intellectual property will be taken into account in the calculation of tax payable overseas.

Summary table

Penalties

The penalty for not providing transfer pricing documentation is a fixed fee of £3,000, however whether documentation is available will be taken into account when determining the penalty for any adjustments that need to be made.

The three levels of inaccuracy used to determine the fine for an adjustment are:

• Careless – up to 30% of lost revenue;
• Deliberate but not concealed – up to 70% of lost revenue; and
• Deliberate and concealed – up to 100% of lost revenue.

From April 2023, for the largest businesses, failure to do the work necessary to maintain the relevant records or to produce those records on request will lead to the presumption that inaccuracy is careless.

When the documentation is requested by the Tax Authority, it should be made available within 30 days or the penalties above will apply.