Transfer pricing in the United Kingdom

Transfer pricing in the United Kingdom at a glance

Regulation Type OECD
Are there specific transfer pricing regulations? yes
Submission deadline N/A
Submission deadline upon request 45 days
Annual update required Yes
Official language requirements English
Potential impact of penalties (N/A)

 

United Kingdom tax law

Rules for transfer pricing in the United Kingdom are based upon:

  • Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010)

OECD

Transfer pricing legislation In the United Kingdom follows the OECD Transfer Pricing Guidelines.

Methods

In the United Kingdom, basically all methods that result in the satisfaction of the arm’s length principle are accepted.

Documentation requirements

Information that should be provided:

  • An identification of the associated enterprises with whom the transaction is made
  • A description of the nature of the business
  • The contractual or other understandings between the parties
  • A description of the method used to establish or test the arm’s length result, with an explanation of why the method is chosen
  • An explanation of commercial and management strategies, forecasts for the business or technological environment, competitive conditions and regulatory framework

Language

Rules for transfer pricing in the United Kingdom prescribe that all documentation should be prepared in English.

Preparation deadline

Under the current guidance, evidence of arm’s length pricing should exist at the time of submission of the relevant tax return.

Deadline to submit upon request

Documentation should be contemporaneous (that is, prepared annually consistent with tax return dates), and must be made available upon request by the tax authorities within the time specified in the request. It is generally expected that documentation should be provided within 30 days of the documentation request.

Advance Pricing Agreements

General

In the United Kingdom, Advance Pricing Agreements (APA) are available since 2010.

Terms

APA’s are generally agreed upon for a period of three to five years forward, however, either the taxpayer or the tax authorities may seek rollback.

Penalties

For accounting periods ending on or after 1 April 2008, the provisions for neglect penalties are set out in Schedule 24 Finance Act 2007. These provisions are couched in terms of careless or deliberate inaccuracies, rather than neglect. They are tax geared at up to 100% of the potential lost revenue figure. However, this is now calculated without adjustment for the availability of loss reliefs and where the adjustment affects losses only; the lost-revenue figure to which the penalty percentage is applied is calculated at 10% of the loss adjustment.

The tax authorities have recently published revised guidance setting out examples of negligence/carelessness which carry lower tax geared penalties (maximum penalty of 30%), and deliberate inaccuracies where the penalties will be higher (maximum penalty of 70%).

Examples of negligence and carelessness include:

  • No attempt to price the transaction
  • Shared service center overseas, cost base, allocation key applied – turnover, modest markup, but no consideration of benefits test for UK entity
  • Policy, otherwise arm’s length, not properly applied in practice

Examples of deliberate inaccuracies include:

  • A clear internal Comparable Uncontrolled Price has been omitted with no reasonable technical analysis to support why it has been disregarded
  • A cost plus return to a company that has in reality controlled the development of valuable intangibles (as not demonstrable as a sub-contractor to group members)
  • Material factual inaccuracies in the functional analysis on which the pricing analysis has been based

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