Latest HMRC transfer pricing compliance risks guidance

HMRC released its latest Guidance for Compliance (GfC7) on 10th September 2024 regarding common areas of risk for transfer pricing compliance and best practices to overcome these risks. The purpose of the guidance is to help businesses reduce uncertainty in their transfer pricing compliance approaches. The guidance aims to clarify HMRC’s expectations of the role the UK business should perform in managing transfer pricing compliance risk.

The guidelines are aimed at UK businesses that have transactions with connected parties that fall in the UK transfer pricing legislation to enable them to play an active role in transfer pricing compliance. The guidance is structured in the following manner to target different primary audiences:

  • Part 1: to assist ‘UK risk leads’ and their associated group functions in establishing and evidencing effective UK transfer pricing compliance processes
  • Parts 2 and 3: to assist ‘transfer pricing specialists’ in best practice policy and documentation approaches
  • Annex A: to assist UK risk leads and specialists with examples of helpful supporting records and information.

Managing compliance risks for UK businesses

UK businesses are required to have a robust transfer pricing framework in place that aligns with the transfer pricing rules and consists of processes, checks, and controls. The guidance aims to raise awareness of the best practices approaches to the timing and scoping of compliance work, business change or trigger events that may require greater focus and the importance of involving UK risk leads in the compliance process.

Common compliance risks

HMRC frequently encounters transfer pricing documentation that is too high level or insufficiently evidenced or the functional analysis does not reflect underlying transaction or business operations. The guidance introduces best practice suggestions to address the risks in the following areas:

  • Compliance planning and scope: scope and depth of the compliance work may impact the quality of the documentation.
  • Common issues with functional analysis: the functional analysis must accurately reflect the UK business activities and relative contributions in a group context.
  • Common issues with comparability analysis: the expectation is that a detailed comparability analysis must be performed for each documented category of the controlled transactions.
  • Common risks in calculations and adjustments: the guidance discusses the common errors relating to allocation, apportionment and categorisation of costs or revenues. 
  • Documenting the functional analysis: the guidance outlines the common quality issues with documentation of functional analysis and recommends the best practice documentation approaches  

Indicators of transfer pricing policy design risk

The guidance is targeted at in house and external transfer pricing specialists to help them identify common risk indicators of policy design that may feature in their arrangements. The common indicators of high-risk approaches relate to following areas:

  • General risks in policy setting approaches: risks arise where there is divergence between transfer pricing design goals and the how the UK business actually operates.
  • Intangible assets ownership and exploitation: where the income is directly or indirectly attributed to the company with legal ownership but the company in question cannot develop, enhance or exploit the intangible asset.
  • Above market intra-group services: UK staff have global or regional roles which either control key DEMPE functions or economically significant risks or create the profit earning activities and contribute to economically significant activities of the group.
  • Transfer pricing target margin models: where transfer pricing approaches aim to deliver fixed rate of return to UK businesses without corresponding adjustments to UK functions, assets and risks.
  • Cost based reward for services: risks can arise in areas such as selection of methodology, definition of cost base, allocation keys employed, net profit indicators and bench-marking of comparable transactions.
  • Sales based reward for services: where the UK business is performing functions or services for which arm’s length reward is defined and measured with reference to sales.
  • Franchise fees and similar single fee arrangements: where a transaction is priced under a single fee approach that involves a bundle of assets and services.

How can we help?

The guidance provides useful information on the best practice transfer pricing activities that can be adopted by UK businesses to ensure these meet HMRC expectations. Our international tax team have a wealth of experience in assisting multinational companies with their transfer pricing requirements. If you have any further enquiries, please get in touch with a member of our International Services team on 01293 227670.