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Summary

On 10 September 2024, HMRC published new Guidelines for Compliance (GfC) regarding help with common risks in transfer pricing approaches.

The GfC documents aim to reduce uncertainty for UK businesses by providing greater clarity and transparency around HMRC's compliance expectations. This release, "Help with common risks in transfer pricing approaches — GfC7," forms part of a series that has been published since 2022 covering various tax areas.

GfC7 is intended to help businesses reduce uncertainty in their transfer pricing compliance approaches by:

• Providing HMRC's expectations for the role the UK business should perform in managing transfer pricing compliance risk
• Highlighting common risk areas to watch out for, or for which greater scrutiny is recommended, together with best-practice approaches to assist UK businesses
• Suggesting useful forms of real-time information and records to be retained
• Raising awareness among specialists of common risks in scoping, preparation, analysis and retention of transfer pricing documentation and best practices
• Highlighting common indicators of risk in designing and selecting transfer pricing policies

The publication of this guidance makes it clear that HMRC considers that there is often a shortfall in quality or comprehensiveness of existing documentation and aims to outline what it considers is best practice. An important part of the guidelines is directed at UK tax-risk leads and their responsibilities; more specific advice for specialists is also provided. Taxpayers should expect this to be an area of focus for compliance and in any discussions with HMRC.

Importantly, HMRC's guidance emphasizes that transfer pricing compliance risk can be addressed by good practices and articulates a number of expectations and recommendations. Taxpayers will be required to exercise a degree of judgment in adopting recommendations, conducting underlying work and providing supporting evidence. The degree of work required to robustly support transfer pricing positions, evaluate and mitigate any high-risk indicators will vary by business but taxpayers should consider that this may be more material than at current levels.

The guidelines form part of HMRC's known position for UK businesses that need to consider whether their transactions fall within the uncertain tax treatment (UTT) notification obligations.

The publication of the guidance makes it clear that a well-reasoned and supported analysis, taking into account triggering events, will be an essential part of the documentation required to support the tax position of UK members of multinational entity (MNE) groups. The guidance is therefore helpful in explaining HMRC's views. The guidance also provides HMRC's view on a number of technical areas and thus should be considered for current state transfer positions as well as future design and compliance.

Detailed discussion

The guidelines are divided into three parts aimed at substantively different but related stakeholders involved in transfer pricing compliance for UK businesses.

Part 1: Managing compliance risk for UK businesses

This part is positioned to assist UK risk leads and their associated group functions in establishing and documenting effective UK transfer pricing compliance processes. It looks at:

• Transfer pricing compliance planning and scope
• Implementation and monitoring checks
• Transfer pricing analysis and documentation
• Filing a return on an arm's-length basis

The guidance specifically addresses:

• Trigger events and business changes
• UK-specific factfinding and review
• Timeliness
• Statutory obligations for UK risk leads including tax accounting, tax return declarations and new UK transfer pricing records requirements

Part 2: Common compliance risks

This part is positioned to assist in-house tax and external transfer pricing specialists that are involved in:

• Setting transfer pricing policies
• Defining the scope of transfer pricing compliance work
• Performing the transfer pricing analysis
• Preparing transfer pricing documentation on behalf of UK businesses

This part of the GfC is intended to assist UK risk leads and their associated group functions in establishing and documenting effective UK transfer pricing compliance processes through:

• Determining the scope of work
• Building governance, controls and checks
• Evidencing that a return is on an arm's-length basis

It addresses common issues and risks in functional analysis, comparability analysis, calculations and adjustments and how these are documented. There is a particular focus on localization of materials (for non-UK-headquartered businesses), contemporaneous evidence, management of business risk, delineation of transactions and people functions throughout the organization.

Part 3: Indicators of transfer pricing policy design risks

This part is aimed at those involved in setting transfer pricing policies and reviewing for risks in existing policy approaches. As such, in multinational groups there may be stakeholders outside the UK who should read this guidance.

The guidance addresses high-risk indicators in transfer pricing policies and suggests best practices to reduce risk. HMRC considers that existing policies may be constructed at too high a level, insufficiently supported by analysis, or may not properly reflect UK business.

Specific areas addressed include:

• Intangible assets
• Above-market intra-group services
• Target margin models
• Cost-based reward and sales-based rewards for services
• Franchise fees and similar single-fee arrangements

The risk areas included in this part of GfC7 are not exhaustive and are not presented in order of priority. Financial transfer pricing is not covered in depth within these guidelines. Limited references to financial transactions or other areas should not be viewed as implying that HMRC sees these areas as risk-free. In the future, HMRC may develop further guidelines to supplement GfC7.

Annex A — Examples of helpful supporting records and information

The new guidance is supplemented by a fairly comprehensive list of the records that HMRC considers would help support transfer pricing positions. The examples are not intended as a "checklist" of supporting information which businesses are expected to retain in full but will be informative as to the depth of information that HMRC often wish to consider in risk assessments and enquiries.

Implications

The detailed discussion in this guidance illustrates some of the key areas of technical design and transfer pricing policy that HMRC has raised recently in transfer pricing enquiries and other engagements with taxpayers. It also addresses, at some length, considerations for the planning and conduct of compliance processes and levels of analysis and supporting information required.

The guidelines are substantial and are relevant to different roles within multinational enterprises and their advisers. Accordingly, they should be read by a number of audiences.

UK businesses or specialists responsible for UK tax compliance will want to consider the following actions:

• UK tax risk leads should be alerted at the earliest opportunity and a discussion planned with them.
• Tax specialists should consider existing compliance processes and quality and comprehensiveness of UK transfer pricing evidence.
• Tax specialists need to consider identified policy risk areas and supporting analysis.
• Tax specialists should review current transfer pricing inquiries and current transfer pricing policy designs for risk indicators as articulated by HMRC.