UK transfer pricing documentation requirements

The consultation

Earlier this year the UK tax authority, HM Revenue & Customs (HMRC), ran a consultation regarding formalising UK transfer pricing (TP) documentation requirements. At present, the UK TP documentation requirements are not as formal as many other jurisdictions and are limited to taxpayers being required to keep contemporaneous evidence of arm’s length transactions.

The outcomes

On 30 November, HMRC announced the outcome of the consultation. HMRC will introduce new legislation for the largest groups to include a requirement to prepare master file and local file documentation. Specifically, businesses subject to country-by-country reporting requirements (i.e. those businesses with consolidated turnover greater than €750m) will be required to prepare, maintain and produce on request (i.e. within 30 days’ notice) master file and local file documentation. The documentation requirements will be closely linked to the OECD standard, which was the preferred approach of most businesses responding to the consultation.

A requirement to prepare an ‘evidence log’ to support the local file has been dropped. Businesses raised concerns around the proportionality of such a measure for a wide range of transactions. Instead, a Summary Audit Trail (SAT) will be introduced, which will be a short document to be appended to the local file to summarise the work the business has undertaken to conclude that pricing is at arm’s length.

It is worth noting that the Government intends to adopt a materiality threshold in-line with OECD standards with the aim being to focus on material transactions. This will be explained further in published guidance in due course. Additionally, UK-UK transactions are not required to be included unless there is a ‘material tax risk’, which presumably means where the transfer pricing impacts the overall level of UK tax due.

The consultation also raised the possibility of the introduction of an ‘international dealings schedule’, which would provide detailed transactional information to assist HMRC in assessing transfer pricing risk. Such a measure raised concern among businesses responding to the consultation regarding the associated compliance burden of this, and the Government has confirmed that this measure will not be adopted, nor will the Government consult on it further. However, it will remain ‘under review’, noting that the Government acknowledges that any additional requirement in this area must not create a disproportionate compliance burden.

Draft legislation will be published in 2022 along with a consultation over the legislation. The new requirements will take effect from April 2023.

The impact

The new rules provide a more formal framework for transfer pricing documentation in the UK, and it is clear that even for smaller groups, the prescribed format of documentation will be seen as ‘best practice’ by HMRC. We recommend groups regularly refresh their TP documentation in order to ensure that the facts remain current (and therefore the transfer pricing policies are appropriate), and also to avoid a process of retrospective documentation in the event of HMRC enquiring into the company’s transfer pricing arrangements.

If you would like to discuss the potential impact of these rules and better understand how we might be able to assist you with your TP policies, please do reach out to one of our experts using the details on this page.

The consultation

Earlier this year the UK tax authority, HM Revenue & Customs (HMRC), ran a consultation regarding formalising UK transfer pricing (TP) documentation requirements. At present, the UK TP documentation requirements are not as formal as many other jurisdictions and are limited to taxpayers being required to keep contemporaneous evidence of arm’s length transactions.

The outcomes

On 30 November, HMRC announced the outcome of the consultation. HMRC will introduce new legislation for the largest groups to include a requirement to prepare master file and local file documentation. Specifically, businesses subject to country-by-country reporting requirements (i.e. those businesses with consolidated turnover greater than €750m) will be required to prepare, maintain and produce on request (i.e. within 30 days’ notice) master file and local file documentation. The documentation requirements will be closely linked to the OECD standard, which was the preferred approach of most businesses responding to the consultation.

A requirement to prepare an ‘evidence log’ to support the local file has been dropped. Businesses raised concerns around the proportionality of such a measure for a wide range of transactions. Instead, a Summary Audit Trail (SAT) will be introduced, which will be a short document to be appended to the local file to summarise the work the business has undertaken to conclude that pricing is at arm’s length.

It is worth noting that the Government intends to adopt a materiality threshold in-line with OECD standards with the aim being to focus on material transactions. This will be explained further in published guidance in due course. Additionally, UK-UK transactions are not required to be included unless there is a ‘material tax risk’, which presumably means where the transfer pricing impacts the overall level of UK tax due.

The consultation also raised the possibility of the introduction of an ‘international dealings schedule’, which would provide detailed transactional information to assist HMRC in assessing transfer pricing risk. Such a measure raised concern among businesses responding to the consultation regarding the associated compliance burden of this, and the Government has confirmed that this measure will not be adopted, nor will the Government consult on it further. However, it will remain ‘under review’, noting that the Government acknowledges that any additional requirement in this area must not create a disproportionate compliance burden.

Draft legislation will be published in 2022 along with a consultation over the legislation. The new requirements will take effect from April 2023.

The impact

The new rules provide a more formal framework for transfer pricing documentation in the UK, and it is clear that even for smaller groups, the prescribed format of documentation will be seen as ‘best practice’ by HMRC. We recommend groups regularly refresh their TP documentation in order to ensure that the facts remain current (and therefore the transfer pricing policies are appropriate), and also to avoid a process of retrospective documentation in the event of HMRC enquiring into the company’s transfer pricing arrangements.

If you would like to discuss the potential impact of these rules and better understand how we might be able to assist you with your TP policies, please do reach out to one of our experts using the details on this page.