01 May 2025 UK HMRC opens consultations on transfer pricing with proposals for SME exemption, ICTS and broader TP reform
On 28 April 2025, His Majesty's Revenue & Customs (HMRC) opened a 10-week consultation proposing to remove the transfer-pricing exemption for medium-sized enterprises, refine the "small-enterprise" thresholds and introduce an International Controlled Transactions Schedule (ICTS). Further, also on 28 April, HMRC released a companion consultation on reforming UK transfer-pricing law, permanent establishments (PE) and Diverted Profits Tax (DPT), with draft legislation to exempt most UK-to-UK transactions where no tax arbitrage exists, consolidate the participation condition and modernize enforcement powers. Read together, the two papers confirm HMRC's shift to a risk-based model, reducing compliance where UK risk is low while requiring richer cross-border data to target profit-diversion risk. The legislative changes proposed in HMRC's April 2025 consultations would constitute the most significant overhaul of UK transfer-pricing (TP) rules since 2004. The documentation and scope consultation (this Alert's main focus) would abolish the TP exemption for medium-sized enterprises and create an ICTS filing requirement. The reform consultation would supply the legislative backbone, proposing (1) a general exemption for domestic company-to-company provisions where no tax advantage arises, (2) options to broaden or streamline the participation condition and (3) new HMRC Commissioners' power to counteract abuse. The two measures are designed to operate in tandem to lighten purely domestic compliance while equipping HMRC with better data and modernized rules to assess higher risk cross-border transactions. What is proposed?: HMRC would repeal the exemption for medium-sized enterprises. A medium-sized enterprise is currently defined as an enterprise that:
Only groups that remain below the small-enterprise thresholds on a consolidated basis would be exempt, with loss of status triggered by two consecutive years above the limits. Why now?: HMRC notes that most peer jurisdictions apply TP universally and many UK-headed medium-sized groups already comply with TP overseas. Re-denominating the thresholds, in sterling, as noted below, could help address exchange-rate volatility. Threshold refinement: The turnover and balance-sheet ceilings for small enterprises would be revised from €10m to £10m, which is still lower in real terms than the 2004 level after inflation and continue to apply by reference to consolidated group figures. The small enterprises threshold for employee headcount would remain at fewer than 50 persons. Metric review: Government analysis concluded that neither a single-metric test nor a transaction-value/volume test would be more practical, so the existing three-metric framework (staff, turnover, assets) would be retained. Election and HMRC notices: Small enterprises would still be able to elect into TP, and HMRC would retain its power to issue TP notices to small enterprises where Patent Box profits are affected. Non-qualifying territory rule: HMRC is consulting on alternatives, including limiting the rule to transactions with territories that have a headline corporation-tax rate (i.e., highest statutory corporate income tax rate) that is below the UK. Scope: All UK companies and PEs outside the small enterprise definition would file an ICTS if their aggregate cross-border related-party transactions exceed £1m. Content: The draft template comprises: (1) aggregated tables of income and expenditure by transaction type, counter-party and TP method (de-minimis £100k); (2) detailed loan data (de-minimis £5m balance and £100k P&L impact, higher thresholds for CbCR filers); (3) binary risk-flag questions. Domestic TP repeal: There would be a general exemption for transactions between UK corporation taxpayers, with targeted safeguards where arbitrage could persist (different rates/currencies, Patent Box, exempt overseas PE). Taxpayers may elect to apply TP voluntarily. Participation condition: There would be options to consolidate or replace the current related/connected-persons test so TP could apply to all mispriced transactions driven by a special relationship, potentially moving beyond strict shareholding control. Commissioners' sanction: HMRC would have the new power to direct that TP applies where arrangements aim to exploit the domestic exemption or frustrate a UK tax liability without requiring a determination from the HMRC's Commissioners TP Guidelines. Financial-transactions alignment: Draft clauses would seek to bring the UK rules into line with Chapter X of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines by:
DPT integration: The DPT would be folded into corporation-tax legislation (new Part 4A TIOPA 2010) as a 31% Unassessed Transfer Pricing Profits charge, retaining core DPT mechanics but providing access to treaty relief and removing double-tax risks. Part 8 simplification: A single arm's-length valuation standard would apply to cross-border transfers of intangibles, eliminating the need to compute both "market value" (Part 8 CTA 2009) and an arm's-length price (Part 4 TIOPA 2010). PE modernization: The UK PE definition would be updated (including base erosion and profit shifting (BEPS) anti-fragmentation wording). Though important, detailed PE changes fall outside the scope of this Alert. OECD-consistency clause: The amended TP rules would be interpreted consistently with the most recent OECD Transfer Pricing Guidelines unless Parliament legislates otherwise. The reform paper narrows the domestic perimeter of TP, which would allow many purely UK-centric transactions to fall outside the regime. At the same time, the documentation paper expands the cross-border perimeter, both by withdrawing the medium-sized exemption and mandating ICTS reporting. The participation condition reform could expand the related/connected party net, which is relevant when completing the ICTS and assessing exemption status. The Commissioners' sanction underscores HMRC's intent to make the domestic exemption conditional on behavior with data-rich reporting expected in return.
If the SME change is enacted, any UK group above the £10m threshold that transacts with overseas related parties will fall within TP rules and be required to prepare the ICTS, regardless of the size of the individual UK entity. In addition, medium-sized groups will be required to implement arm's-length pricing for all cross-border dealings and prepare contemporaneous TP documentation for periods beginning as early as FY 2026-27. Data quality and processes to enable the tax function to access reliable and accurate data will be critical to meeting the reporting requirements of the ICTS. Affected businesses should assess the impact of changes to SME exemption, as well as the impact of the ICTS on operational TP. In addition, they should consider responding to HMRC, directly or through an advisor, on both consultations to address questions on thresholds, data fields and safeguard design.
Document ID: 2025-0974 | |||||||||||||||||||||||||||
