Are changes coming to UK transfer pricing rules?

On 28 April 2025, HMRC announced a consultation period in respect of significant changes to the UK’s Transfer Pricing, Diverted Profits Tax and Permanent Establishment legislation as part of the government’s Spring tax update.

In this article, we will review the key proposed changes and the considerable impact they will have on fast-growing international businesses. The consultation period will close on 7 July; therefore, we recommend that interested parties submit their representations as soon as possible.

How could the UK transfer pricing rules change in 2025?

The UK Transfer Pricing (“TP”) rules require taxpayers to price transactions between connected parties on an ‘arm’s length’ basis. Affected taxpayers should determine a price that independent parties would agree to under comparable conditions and, if necessary, make adjustments in their tax returns for any amount that is not arm’s length. 

The proposed changes aim to enhance HMRC’s visibility of cross-border related-party transactions and align the UK’s approach more closely with that of other countries.

Reform of the Small and Medium Enterprises Exemption

UK-based Small and Medium-sized Enterprises (SMEs) are currently exempt from applying TP in many cases. A group qualifies as an SME if it has no more than 250 staff and either its turnover does not exceed €50 million, or its balance sheet does not exceed €43m.

HMRC is proposing to narrow the scope of this exemption so that it applies only to small businesses. The proposed definition would include groups with no more than 50 staff and either turnover or balance sheet not exceeding £10m.

Are there any additional transfer pricing reporting requirements?

HMRC is also proposing a new disclosure requirement for businesses which do not fall within the SME exemption. Groups which have aggregate foreign related-party transactions of at least £1m must disclose all cross-border related-party transactions over £100k to HMRC through a new International Controlled Transactions Schedule (“ICTS”).

The level of detail being proposed in the ICTS is substantial: for each transaction, businesses must disclose information about the counterparty, the transaction type, the TP method, and, where relevant, the profit level indicator. For related-party financing transactions, businesses must also disclose the applicable interest rates, as well as the opening and closing balances of the transaction.

What is the impact of the proposed changes?

The proposed reform of the SME exemption could lead to a significant increase in administrative and compliance burdens for medium-sized businesses brought within the full UK TP rules for the first time. They will be expected to review the nature, methodology and pricing of their intragroup transactions and prepare appropriate documentation. This will inevitably lead to higher compliance costs for affected businesses, alongside the potential for additional information to be requested during enquiries.

To make matters worse, the introduction of the ICTS will impose additional reporting obligations. Although the consultation proposes features to help limit these obligations (e.g. a higher de minimis threshold for businesses already subject to detailed TP documentation requirements), gathering information, configuring internal reporting systems and building in additional time to year-end reporting cycles will be required.

Tax teams in medium-sized businesses are already stretched and wear many hats on a day-to-day basis. These proposals will require further resources to be devoted to disclosure than ever before, and HMRC will likely continue with its approach of data-led tax audits by using ICTS data to undertake additional risk assessments on taxpayers that have previously not been required to disclose their related party transactions.

Are there changes coming to the Permanent Establishment rules?

The proposals aim to better align the UK domestic definition of a permanent establishment under CTA 2010 with the definition outlined in the 2017 OECD Model Tax Convention. There is a proposal to align the definition of dependent agent permanent establishment and clarify the definition of fixed place of business permanent establishment, excluding construction sites lasting less than 12 months from the scope. The UK’s current c. 150 in-force double tax treaties would not be affected by this change, but any UK taxpayers not covered by a treaty would be.

Profit attribution is currently governed by CTA 2009 and CTA 2010. The proposed updated legislation would include specific references to the supporting OECD documentation, which can be used to determine an appropriate attribution of profits, including the approach set out in the 2010 OECD Report on the Attribution of Profits to Permanent Establishments, commonly referred to as the ‘Authorised OECD Approach’.

What changes are coming to the Diverted Profits Tax?

The consultation document proposes that Diverted Profits Tax (“DPT”) should be repealed and replaced with a new charging provision for ‘Unassessed Transfer Pricing Profits’ (“UTPP”) under Corporation Tax, which would carry a 6%-point uplift in the rate of tax. The changes are presented to provide businesses with a more straightforward compliance process and better access to Double Tax Treaty benefits whilst retaining the essential features of the current DPT regime. The removal of a separate notification requirement will be welcomed by many. However, the proposal that a UTPP assessment can be issued with or without a CT notice of enquiry may still result in uncertainty for businesses.

How can businesses plan for these proposed changes?

Businesses should plan and prepare for these potentially consequential changes. We recommend that you review the current financial performance and future year forecasts to determine whether your business would fall outside the narrower scope of the new small company exemption. If so, undertake a detailed review of all existing intragroup transactions, determining the appropriateness of these intragroup charges and their pricing by reference to the OECD TP guidelines. Furthermore, businesses should ensure that their intragroup transactions are adequately documented and supported by appropriate intercompany agreements.

How can we help?

At AAB, we have a team of specialists with extensive experience advising SMEs, fast-growing companies, and larger corporates across all sectors on transfer pricing and international tax matters.

If you would like to understand how the proposed changes discussed above could affect your business, or if you would like to discuss your business’s concerns before the consultation period closes, please do not hesitate to get in contact with Erica Fitchie, Edwin Goi or your usual AAB contact.