Are SMEs Exempt from Transfer Pricing in the UK?
When it comes to Transfer Pricing (TP) regulations in the UK, many Small and Medium-sized Enterprises (SMEs) often wonder whether they are exempt from these requirements. Transfer Pricing is the practice of setting prices for transactions between related entities, such as a parent company and its subsidiary, and is heavily regulated to ensure that profits are not artificially shifted to low-tax jurisdictions.
Are SMEs Exempt from Transfer Pricing?
In the UK, SMEs are indeed generally exempt from Transfer Pricing documentation requirements. However, this exemption comes with specific conditions. The exemption primarily applies to companies that meet certain size criteria, which we’ll explore further. It’s important to note that while SMEs might be exempt from preparing full Transfer Pricing documentation, they are still required to comply with the “arm’s length” principle. This means that transactions between related parties should be conducted as if they were between independent entities, ensuring fair market value.
What is the Transfer Pricing Rule in the UK?
The UK’s Transfer Pricing rules are based on the arm’s length principle, which is the internationally recognized standard. According to this principle, transactions between related parties must be conducted as if they were between unrelated parties under similar conditions. The purpose of these rules is to prevent profit shifting and ensure that taxable profits are correctly allocated between countries where the multinational company operates.
Under UK law, Transfer Pricing rules apply to any UK business that is part of a multinational group, regardless of size. However, the full documentation requirements, which can be burdensome, are generally waived for SMEs, provided they meet the relevant criteria.
What is the Threshold for Transfer Pricing Documentation in the UK?
While SMEs may be exempt from the full documentation requirements, large businesses must comply with detailed Transfer Pricing documentation rules. The UK follows the OECD guidelines, which mandate that businesses keep thorough documentation to demonstrate that their Transfer Pricing practices adhere to the arm’s length principle.
For those not exempt, the documentation must include a Master File, Local File, and a Country-by-Country report (for the largest multinational enterprises). This documentation should be available for inspection by HMRC upon request.
What Are the SME Limits for HMRC?
HMRC defines SMEs based on specific financial thresholds. As per the current guidelines, a company qualifies as an SME if it meets two out of the following three criteria:
- Turnover: Does not exceed £50 million annually.
- Balance Sheet Total: Does not exceed £43 million.
- Number of Employees: Does not exceed 250.
If a company exceeds these thresholds, it is classified as a large enterprise and therefore must comply with the full scope of Transfer Pricing regulations, including comprehensive documentation.
However, it’s essential for SMEs, even those who believe they are exempt, to evaluate their transactions carefully. If there is a risk that HMRC might challenge the arm’s length nature of related-party transactions, preparing documentation can be a prudent step. For businesses operating internationally, seeking expert advice can ensure compliance and mitigate risks.
For more detailed guidance on how Transfer Pricing rules apply to your business, our international services team offer tailored advice and support to help you navigate these complex regulations.
