Draft Legislation on the UK TP Documentation Requirements

On July 20, 2022, the UK government published a draft legislation with regard to Transfer Pricing documentation requirements which is expected to take effect for accounting periods starting on or after April 1, 2023.

Key changes

The draft legislation provides for regulations to be introduced that would require taxpayers to produce (and provide upon request) TP documentation in a specified format in line with the OECD recommended approach (such as Master file and Local file). In addition, HM Revenue & Customs proposed the introduction of a Summary Audit Trail. The UK had previously implemented the Country-by-Country Reporting requirement.

Since UK taxpayers are already required to keep sufficient records to demonstrate that intercompany transactions have been undertaken using the arm’s length principle, it is expected that this change would only affect the format in which these records are kept. However, preparing the Summary Audit Trail might result in an additional burden for taxpayers.

It was initially stated that this legislation would only apply to the largest companies, although the term “largest” was not defined. As it currently reads, the draft legislation does not define a threshold that excludes any taxpayers (other than small and medium enterprises) from the requirement to prepare TP documentation in the specified format. However, HM Revenue & Customs has confirmed in our discussion with them that the regulations accompanying the legislation will specify the threshold, requiring only MNEs falling within the CbCR regime (i.e. with a consolidated group revenue of more than EUR 750 million) to prepare standardised documentation.

Taxpayers were previously only required to provide records to HM Revenue & Customs which they had in their possession. This has now been broadened to include TP records that are in the possession of any other legal entities of the MNE group.

Changes are also proposed to the penalties regime. Where there are any inaccuracies in documents submitted by taxpayers (e.g. tax returns) and the MNE group falls within the CbCR regime, HM Revenue & Customs will now presume that such inaccuracies are careless unless evidence can be presented to show that reasonable care was taken by the taxpayer to avoid an inaccuracy in the submitted document. Robust TP documentation prepared prior to the submission of a tax return may therefore serve as a protection from increased penalties.

Next steps

The standardised approach may provide taxpayers with more clarity in connection with the preparation of UK Transfer Pricing documentation. Most of the largest MNE businesses have already implemented the standardised OECD documentation format and therefore this legislation will have minimal impact on those entities.

Although the content of the Summary Audit Trail is as yet unknown, HM Revenue & Customs has confirmed that it will be in the form of a questionnaire to document the work undertaken by the taxpayer in arriving at the conclusions in their TP documentation. HM Revenue & Customs has also confirmed that the Summary Audit Trail will not be submitted in an electronic format; hence taxpayers will not be required to introduce any new systems to produce this document. Taxpayers will need to keep the records used to fill in the questionnaire and present them to HM Revenue & Customs upon request.

The draft regulations and the draft Summary Audit Trail will be published in December and be open for consultation.

If you have any questions about the above or would like to discuss how these changes would affect your business, please do not hesitate to contact the authors.

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