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Updated UK Transfer Pricing Regulations 2023

As part of its ongoing review of transfer pricing conditions, HMRC has confirmed that “Transfer Pricing Records Regulations 2023” came into force on 9th August 2023. The new regulations largely confirm positions that we had already discussed in our previous article (link) on UK documentation but they also clarify some important additional points.

To reiterate some points from our prior article, the regulations only impact those Groups with over €750 million in revenue for accounting periods beginning on or after 1st April 2023 and for income tax purposes from the 2024-25 tax year. Groups this size now need to prepare the Master File and Local File in accordance with the OECD guidelines. Nevertheless, smaller groups still have the obligation to produce transfer pricing documentation which demonstrates that their position is compliant with the arm’s length principle.

The new regulations confirm that the following do not need to be documented:

  • UK-UK transactions unless one of the parties has elected into Patent Box or is carrying on a ring fence trade; and
  • Transactions covered in Advance Pricing Agreements made on or prior to 31st March 2023.

HMRC has released additional guidance, which has impacts on entities of all sizes, which indicates:

  • A single report can be prepared for multiple UK entities so long as the information provided for each entity meets the requirements of the OECD Local File.
  • Master Files and Local Files are to be reviewed annually.
  • Only material transactions need to be included in the Local File. There are various conditions which determine materiality, and we would recommend checking any individual cases with a transfer pricing expert. Nevertheless, general points to consider are:
    • Materiality in relation to transactions is to be decided on the basis of the UK entity rather than the Group;
    • Certain categories of transactions will always be considered material namely:
      • transactions priced using a profit split methodology;
      • transactions concerning the transfer or licence of intangible assets;
      • transactions concerning Hard to Value Intangibles;
      • transactions concerning the transfer, use, or right to use key strategic assets that are required for the entity to carry on its business;
      • transactions concerning global or regional strategic leadership services;
      • transactions concerning Cost Sharing Agreements or Cost Contribution Agreements;
      • transactions concerning business reorganisations, including where functions, assets or risks have been moved into or out of the UK during the relevant period; and
      • commencement or cessation of transactions in the relevant period
    • Other categories of transactions are considered to be material by default where the aggregated transactions of that type exceed £1 million; and
    • Transactions which do not meet the £1 million threshold still need to be reviewed by the taxpayer who must decide is they are material and HMRC has provided a list of factors to consider when making a materiality judgement. It should also be noted that the new materiality exemption only gives relief from the obligation to document the transaction in the Local File not from the UK transfer pricing rules.

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