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His Majesty's Revenue and Customs (HMRC) in the UK continue to closely scrutinize taxpayer arrangements in relation to transfer pricing. This has prompted increased requirements around transfer pricing documentation, rules that are now in force. Alongside this HMRC now places greater focus on the end-to-end process and governance for transfer pricing and is proposing forthcoming reforms to both simplify current rules and expand their reach.
HMRC’s growing investment in transfer pricing oversight
In recent years, HMRC has allocated significant time and resources to auditing transfer pricing matters, driven by strong returns and a continued belief that a substantial ‘tax gap’ remains. According to recent figures, HMRC recovered nearly £2 billion through transfer pricing and Diverted Profits Tax (DPT) activity in the 2023–2024 tax year alone, supported by approximately 400 full-time equivalent staff. This expanded enforcement effort has given HMRC greater clarity on acceptable practices and prompted a renewed emphasis on compliance, particularly with respect to documentation.
Stricter documentation requirements
A key development is the introduction of more prescriptive transfer pricing documentation requirements for accounting periods beginning on or after April 1, 2023. This shift marks a departure from the UK’s traditionally flexible approach to the format of documentation, moving closer to global norms and, in some areas, going beyond them. Under the new rules, large UK businesses subject to country-by-country reporting must prepare a Master File (at the global level) and a Local File (at the UK entity level).
While documentation does not need to be filed with the return, it must be complete and available at the time of filing. The UK operates a behavior-based penalty regime, and robust documentation can help demonstrate reasonable care potentially reducing or even eliminating penalties in the event of an adjustment following an audit. Where documentation is lacking, HMRC may presume carelessness, increasing the minimum penalty to 15% and extending the statute of limitations to six years.
These changes were reinforced in detailed guidance released by HMRC in the autumn of 2024, which outlines both compliant and higher-risk practices in policy design and execution. The message is clear: HMRC is intensifying its audit activity, and businesses must analyze whether their documentation and internal processes are strong enough to meet heightened expectations.
Planned legislative reforms
Two consultations closed in mid-2025 that signal further changes aimed at simplifying domestic rules and aligning more closely with OECD standards.
The first consultation covers proposed reforms to transfer pricing, permanent establishment (PE), and DPT.
- Among the headline transfer pricing measures is a long-anticipated exemption for UK-to-UK transactions where no tax loss arises. Amendments also have been proposed to the participation condition, which determines whether transfer pricing applies based on the level of control or influence between entities, potentially broadening the scope of related-party transactions. Other proposed updates include the adoption of a single arm’s length valuation standard for intangible transfers and refinements to financial transaction rules, particularly around guarantees and implicit support.
- Proposed PE reforms aim to align UK rules with the OECD’s 2017 Model Tax Convention. Although the UK’s treaty positions currently limit immediate impact, key changes include narrowing the independent agent exemption and refining the investment manager exemption, both of which may affect entities in non-treaty jurisdictions. The government also plans to align profit attribution and capital gains rules with the OECD’s authorized approach, bringing greater certainty to cross-border tax matters.
- The current DPT regime would be replaced by a new charging provision called Unassessed Transfer Pricing Profits (UTPP), subject to a rate six percentage points above the standard corporate tax rate (therefore currently 31%). This reform would bring UTPP into the corporation tax system while expanding access to double tax relief mechanisms such as the Mutual Agreement Procedure. The gateway conditions that determine scope also would be revised, and the prior safe harbor would be replaced with a “tax design condition,” necessitating fresh analysis for many taxpayers.
A separate consultation targets small and medium-sized enterprises (SMEs). It proposes removing the transfer pricing exemption for medium-sized businesses, while retaining it for small businesses—defined as having fewer than 50 employees and either revenue or total assets under £10 million. Group size determinations would be simplified by aligning with revised UK participation rules.
In addition, HMRC is considering introducing an International Controlled Transactions Schedule (ICTS), which would apply to all UK entities within scope of the UK’s transfer pricing rules, including UK PEs of non-resident entities and UK entities with foreign PEs. Companies would need to complete the ICTS if total cross-border related-party transactions exceed £1 million (with no netting). Filed with the tax return, the ICTS would supplement country-by-country reporting and serve as a risk assessment tool, but its prescribed format could increase compliance burdens.
Prepare for what’s ahead
Looking ahead, the government intends to incorporate feedback from the first transfer pricing/PE/DPT consultation into final legislation for inclusion in Finance Bill 2025–26, which is likely to take effect in 2026. Responses to the SME consultation, which is still at an earlier stage, will be analyzed with a formal government response expected by early October 2025. Any resulting measures then could be introduced at a future fiscal event.
Wide range of impacts
Quantifying specific impacts is a critical step. Some tax reform rules and proposals focused on simplification may lessen the burden on transfer pricing compliance teams, such as the exemption of certain UK-to-UK transactions and the treatment of intangible assets transfers. Others may post a significant burden, such as documentation requirements and new reporting under the proposed ICTS. Still others are likely to prompt more analysis, including the application of renewed PE thresholds particularly for non-treaty countries, and the new UTTP that may generate greater treaty relief.
Taxpayers should evaluate the impact on their overall risk profile, and the potential effect on future audits. These changes also may prompt companies to take a fresh look at the effectiveness of their transfer pricing operations in the UK.
Documentation readiness
For calendar-year-end businesses, the first compliance year is 2024, with transfer pricing documentation required by the tax return filing deadline in December 2025. Although the documentation does not need to be filed with the tax return, it must be prepared contemporaneously. Failing to meet this standard may expose businesses to penalties, and may negatively impact the taxpayer’s rating potentially leading to more audits.
To prepare, companies should focus on building well-supported transfer pricing positions, based on objective and contemporaneous evidence, particularly through high-quality functional interviews.
A broader, end-to-end approach
Equally important to documentation is demonstrating reasonable care through strong transfer pricing processes, including governance, controls, and implementation, as HMRC is placing greater emphasis on the end-to-end management of transfer pricing. Companies also should keep up to date with the consultations as they progress and consider which elements may be impacted. Meeting these expectations will be essential to navigating the UK's evolving compliance landscape.
Changing scope of rules
Some medium-sized businesses currently may be exempt from UK transfer pricing rules, but under new proposals, now may be in scope. Companies should consider whether new compliance obligations may apply if they are implemented.
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