As HMRC’s approach to transfer pricing compliance continues to evolve, businesses with cross-border and intra-group transactions face increasing expectations around transparency, documentation and consistency.
The upcoming introduction of the International Controlled Transactions Schedule (ICTS) marks a significant change in how HMRC gathers and assesses transfer pricing information.
HMRC will use this information to target mid-market companies to raise £350 Million in additional tax from more transfer pricing investigations.
Robust, well-documented and consistently applied transfer pricing policies which support the information are more important than ever.
What is transfer pricing?
Transfer pricing refers to the pricing of transactions between related entities in accordance with the internationally recognised arm’s length principle. This principle seeks to replicate the pricing that would apply between independent parties under comparable conditions (market value). Related parties include entities under common ownership, as well as companies within the same group.
Transfer pricing rules can apply to a wide range of transactions, including the provision of services, the sale of goods, financing arrangements and the use of intellectual property.
What’s changing in UK transfer pricing?
International Controlled Transactions Schedule (ICTS) confirmed
A new UK transfer pricing filing requirement will apply for accounting periods beginning on or after 1 January 2027. The International Controlled Transactions Schedule (ICTS) will require affected businesses to submit standardised disclosures of cross-border related-party transactions directly to HMRC.
An ICTS filing will not be required where the SME transfer pricing exemption applies or:
- there are no transactions with entities in non-qualifying territories and
- the aggregate value of cross-border related-party transactions is less than £1million
This standardised annual reporting is expected to give HMRC greater visibility of transfer pricing risk at an earlier stage, increasing the likelihood of targeted enquiries. HMRC estimates that around 75,000 businesses will fall within the scope of the ICTS.
SME exemption
In April 2025, HMRC consulted on the potential removal of the transfer pricing exemption for medium-sized enterprises. Most companies with fewer than 250 staff will continue to be exempt from the rules, so long as they have less than either €50m of sales or €43m of assets.
The exemption doesn’t apply to transactions with companies based in some offshore territories. Also, if a SME does business with a related party in a low-tax country, there are similar rules which can apply if it’s reasonable to believe that the pricing has been influenced by tax savings.
HMRC has confirmed that it will not proceed with changes to the SME exemption for now. This is welcome news for affected businesses, although it does not reduce the importance of ensuring pricing remains commercially justifiable and defensible in practice. Smaller businesses need to be aware that they may not be fully exempt.
What should you do next?
Now is the ideal time to review your arrangements. The introduction of the ICTS is expected to increase HMRC’s ability to identify transfer pricing risk at an early stage and may result in more targeted transfer pricing enquiries. Refreshing methodologies, tightening internal controls, and preparing clear documentation will help ensure you are fully ready when the new obligations take effect.
Every group is different and faces its own transfer pricing challenges. Hazlewoods adopts a bespoke and practical approach to transfer pricing compliance. If you would like support reviewing your transfer pricing position or understanding how the new rules may affect your business, our specialist team is here to help.
