UK: HMRC’s transfer pricing settlement policy
Advice issued by HMRC to their compliance teams on settling transfer pricing enquiries.
HM Revenue & Customs (HMRC) issued new advice to their compliance teams and governance boards on settling transfer pricing enquiries where HMRC consider that a taxpayer’s filed position is outside the arm’s length range and relief from double taxation is available by treaty under the mutual agreement procedure (MAP).
In such cases, the default position will be for HMRC to adjust to a central point in the range (e.g., the median in the set of comparables used to establish the arm’s length range). Taxpayer settlement proposals to adjust to a lower, or higher, point in the range are unlikely to be accepted without very strong technical arguments.
Background
The fundamental compliance requirement, emphasised by HMRC, is for taxpayers to self-assess their tax liabilities and declare to HMRC that the information provided in the self-assessment is correct and complete to the best of their knowledge. In connection with transfer pricing, this means that an in-scope taxpayer is obliged to price related party transactions, for tax purposes, in accordance with the arm’s length principle.
Unfortunately, establishing the arm’s length price or range of prices can be challenging because of data limitations and involves the exercise of considerable professional judgement. In a transactional net margin method (TNMM) benchmarking analysis for example, a decision is usually required as to whether differences in economic circumstances between each potential comparable party and the taxpayer, or the absence of information to make detailed comparisons, are sufficiently minor to permit a reliable conclusion on pricing. In some cases, all potential comparables are likely to have comparability defects but are the closest that can be identified. Sometimes these differences can be reliably adjusted for and sometimes this is not possible due to data limitations or other factors.
New approach
HMRC’s new approach to transfer pricing settlement standards is explained by reference to their litigation and settlement strategy (LSS), which “requires HMRC to adopt an approach that secures the best practicable return to the exchequer. It also states that when there is a range of possible figures for tax due, HMRC will not settle by agreement for less than it would reasonably expect to obtain from litigation.”
However, the negotiation process involved in MAP means that a settlement under the LSS does not provide final certainty over the tax ultimately payable in the UK; the Competent Authorities of the two treaty partners may agree a different resolution. It is also possible for taxpayers to suspend payment of tax pending the outcome of MAP, which can delay when HMRC is able to establish and collect the final tax liability. HMRC have explained that they are taking particular care to ensure consistent audit settlement positions in cases with potential to go to MAP. Such consistency may facilitate efficient resolution of double taxation and provide value to the UK Exchequer.
Read a November 2025 report prepared by the KPMG member firm in the UK