The Government has been consulting on changes to the UK’s transfer pricing rules. Hazlewoods has participated to ensure that our clients’ interests are represented. The transfer pricing rules prevent businesses from shifting taxable profits out of the UK. They require that businesses are taxed as if related party transactions occurred at “arm’s length” prices. Businesses are required to maintain documentation to support the tax return entries. We focus here on the proposals with the biggest impacts for businesses.
- Many more medium sized businesses will come within the scope of the rules.
- New reporting requirements are going to be introduced.
- Most businesses who only have domestic transactions will be removed from the scope of the rules.
Reform of “SME exemption”
The Government proposes to remove the exemption for medium sized companies and proposes that small companies will remain exempt from the transfer pricing rules. Changes are proposed to the definition of a small company. A small company has fewer than 50 employees and less than either €10m turnover or €10m assets. Related companies’ employees, income and assets count towards these totals. The Government proposes to mitigate the impact of this measure slightly by using the same threshold numbers but expressed in Pounds Sterling. We have urged the government to consider higher thresholds. Businesses with 50 to 250 employees will come within scope. Businesses with more than £10m of assets and £10m of turnover will probably come within the scope. Whatever detailed definition is finally decided on, it’s clear that many more medium sized companies will need to comply with the UK Transfer Pricing rules in the coming years. Many medium-sized businesses have previously had to apply transfer pricing rules to meet requirements in other countries. Many have not and will have to consider transfer pricing for the first time.
Reporting
The Government proposes to introduce an additional reporting requirement. A statement showing details of transactions with related parties in other territories will need to be submitted. This will also apply to UK companies with overseas branches or to UK branches. Different types of transactions will need reported separately, with details of transfer pricing policies used. There will be minimum transaction value thresholds. Currently, this level of detail only needs to be reported by very large companies and these reports do not need to be submitted as a matter of course. Businesses should start thinking now about whether their current policies and record keeping arrangements will be suitable to facilitate the reporting
UK-UK Exemption
Finally, the good news! Most transactions between UK companies will no longer be subject to Transfer Pricing. This is because there is generally no risk of loss of tax to the exchequer from such transactions. Most intra-group management charges and similar arrangements will no longer be subject to the arm’s length rule. This isn’t a blanket exclusion, and the detail is still to be finalised. Domestic transactions that involve individuals or partnerships will not be exempted by the new rules. In summary, this is good news for large domestic groups but unwelcome for medium multinationals. There is no fixed timetable for implementation but the changes could be made in the next Finance Act. Next steps for medium- sized multinationals:
- Identify what intragroup or related party transactions UK companies have with non-UK parties.
- Consider whether these are adequately covered by existing transfer pricing policies and documentation.
- Ensure that suitable transfer pricing policies are implemented and documented.
- Ensure that record keeping practices and systems will facilitate reporting.
Please contact one of our experts to find out more about any of the issues outlined above, or to discuss your transfer pricing affairs in general.