Do you meet HMRC’s Transfer Pricing compliance expectations?

On 10 September 2024 HMRC published their Guidelines for Compliance (GfC) dealing with transfer pricing (TP) risks. This is an important set of documents intended to provide HMRC’s view on the application of complex, widely misunderstood or novel areas of the tax rules to practical situations. The GfC reflect an increased focus by HMRC on encouraging voluntary compliance and are a response to requests from businesses for greater transparency and clarity from HMRC to help them manage tax risk. They include best practice examples to follow and highlight approaches that can lead to inaccuracies and the need to pay more tax, interest and penalties. In our recent experience, HMRC are increasingly willing to seek penalties in TP cases, including penalties for deliberate understatement where a business knowingly fails to review or refresh its TP policies.

Notable in the TP GfC is the recommendation that businesses should identify one or more ‘UK risk leads’ – senior finance, risk or tax personnel – responsible for managing transfer pricing in accordance with the Guidelines. The UK risk lead is mentioned frequently, and it is clear that HMRC expect businesses to ensure that a suitably senior, experienced and authorised person or persons are in place to handle TP matters. 

The GfC share best practice about the role of UK risk leads in engaging with specialists across the TP compliance lifecycle. They emphasise the importance of scoping compliance activity in order to manage and deal with potential TP risks before they arise. The Guidelines also reiterate the need for robust and up to date documentation, regularly reviewed by the UK risk leads and amended as necessary.

Of equal importance is the effective implementation of the TP policy, by ensuring that intra-group contracts, internal processes controls and accounting systems are consistent with the TP approach. There is a substantial annex on supporting business records and information with examples that HMRC would expect to see in relation to specific circumstances and areas of analysis.

The Guidelines give useful detail on the types of risk that HMRC’s experience has identified. Important steps that businesses should take include the following:

• Ensuring that TP policies are aligned with operations, up to date with respect to both ongoing business evolution and business restructurings;
• Making sure that the TP outcomes appropriately reflect the value created by commercial functions and risk management activities. HMRC will be concerned where a business has placed excessive reliance on the contractual allocation of commercial risks and/or ownership of valuable assets (such as intangibles) at the expense of value generation;
• Ensuring that the functional analysis correctly reflects the UK business and transactions, including sufficient localisation where documentation is prepared centrally. The transactions must be accurately delineated, including an accurate analysis of the distribution of important functions and commercial risks between group entities;
• Reliability of rolled forward comparable data must be maintained by checking that the economically significant factors of both the UK tested party and the independent comparables have not changed since the initial comparability analysis was performed. A full new comparable search is expected at least every three years; and
• The Guidelines also point out that HMRC often encounter calculation and apportionment errors, including where different accounting standards are used, so effort should be devoted to instituting Operational TP processes to manage these.

Businesses should therefore revisit their TP policies, internal procedures and authority levels. We recommend reviewing existing TP documentation and updating for any developments since it was prepared, such as reflecting any business changes and refreshing comparable data. Options for tax authority engagement to improve certainty should also be considered. These include seeking an Advance Pricing Agreement (APA) or a risk assessment under the OECD’s International Compliance Assurance Programme (ICAP).

The GfC provide significant additional insight and detail in areas where HMRC think this helps taxpayers to meet HMRC’s expectations. Businesses are not obliged to follow them, but the clear identification of risk indicators strongly suggests that doing so should reduce the risk of unanticipated tax, interest and penalty costs. UK members of multinational groups should carefully consider the implications for their own circumstances.

For further information please contact:

• Nick Stevart
• Charles Havisham