14.01.2025
United Kingdom: HMRC's Transfer Pricing Guidelines for Compliance (GfC)
Introduction
In the tax year 2023/24, HMRC raised £9.3 billion in corporation tax from the UK financial services industry and transfer pricing (TP) transactions and adjustments will have made a sizeable contribution to this. Within the UK tax legislation there are certain exemptions for businesses within the financial services industry but in the main this does not extend to UK TP legislation.
In the last couple of years, there have been updates to the UK TP legislation and requirements, and it is clear from reported tax revenues that TP is a key area of focus for HMRC in tax audits.
Following on from this, HMRC recently released TP GfC to focus on ensuring businesses adopt proactive, robust, evidence-based approaches to setting and documenting intercompany transactions.
For tax professionals, these guidelines serve as both a roadmap and a warning: a clear framework for compliance to provide tax-payers with more guidance but with increased scrutiny and potential risks for those who fall short. There are recurring scoping and quality themes throughout, geared around raising standards of compliance. The themes reflect observed HMRC day-to-day practices that have been evident for some time.
In the UK there is already a requirement for businesses to retain a file of supporting information and an ability to demonstrate, with underlying evidence, the level of care taken to calculate the arm's length return at the time of filing the tax return. In turn, this evidence is highly relevant to penalty determination. Consequently in a tax audit the benefit of good documentation is that it will result in a 'more focused and less protracted enquiry process reducing compliance costs'. A vital point in this context is the localisation of multi-territory analysis. What emerges from this is that it can’t be a “one size fits all”. A full consideration of the UK position has to be undertaken.
Managing compliance risks
A key change is that HMRC is focused on understanding who the UK risk lead is in a group, and how seriously they are considering TP. The guidelines contain a number of recommendations relating to the UK risk lead, including strongly recommending that the UK risk lead asks those setting the group TP policies to flag to them the high-risk indicators.
Common compliance risks
HMRC's message here is to increase the rigour and depth of the analysis and to perform it contemporaneously. It is clear that HMRC are not happy with the standard of analysis and documentation that they are currently seeing. The guidelines provide plenty of thoughts on the format, content, and style of documentation, mostly through the lens of functional and comparability analysis.
Roll forward analyses are also a target for HMRC, as they are perceiving that there is a lack of care when rolling forward pre-existing materials. This could lead to a potential for tax-geared penalties.
What does this mean for FS?
In contrast to their historic approach, HMRC are increasingly challenging UK taxpayers across the financial services industry as they streamline their tax audits to those with a greater chance of yielding higher tax receipts. This has been successful where for example TP models for fund structures have not been updated, and consequently incorrect TP amounts have been booked for a number of historic years. Equally HMRC are also focused on understanding the implementation of transfer pricing policies, especially where there is a high level of financial complexity and consequently bigger risk of errors.
On a positive note, more recently, we have seen a much sharper focus on TP from private equity portfolio businesses keen to update their policies and documentation particularly immediately before or after a transaction.
Key Takeaways
This guidance brings three main messages into focus:
- To apply a UK lens to TP transactions
- Contemporaneous analysis to be performed
- Greater depth and evidence to support the policies and the documentation
In conclusion this 100-page guidance produced from HMRC is very helpful in providing taxpayers with some certainty regarding TP compliance. However it may also indicate that taxpayers can expect to have more engagement with HMRC on TP going into 2025 and beyond.
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