The UK Unassessed Transfer Pricing Profits (UTPP) Regime

The United Kingdom’s Unassessed Transfer Pricing Profits (UTPP) regime represents a significant reform of the country’s approach to taxing multinational enterprises and countering profit diversion. Introduced through the Finance Act 2025, following publication of the Finance (No.2) Bill on 4 December 2025, the regime replaces the long-standing Diverted Profits Tax (DPT) and embeds its core concepts within the mainstream corporation tax framework.

This reform is part of a broader effort to modernise UK international tax rules, align domestic legislation more closely with OECD transfer pricing principles, and ensure that profits generated from UK economic activity are appropriately taxed in the UK.

From a policy perspective, the UTPP regime is designed as a targeted anti-avoidance tool that focuses on cases where multinational groups use contrived arrangements to reduce their UK tax base through non-arm’s-length pricing. It is intended to encourage compliance, improve transparency, and give HMRC stronger tools to address underreported profits without relying on a separate tax system such as DPT.

Legislative background and implementation timeline

The UTPP provisions are incorporated into UK law through Part 4A of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). The regime emerged following a period of consultation during 2025 on reforming transfer pricing, permanent establishment rules, and the DPT framework.

In terms of timing, the rules apply to accounting periods beginning on or after 1 January 2026, marking a clean transition point from the previous regime. Before this date, the Diverted Profits Tax continues to apply to accounting periods from its introduction on 1 April 2015 through to 31 December 2025.

The legislative journey can therefore be summarised as follows:

• consultation and draft legislation were published during 2025,
• the Finance Bill was introduced in December 2025, and
• the new regime became effective from the start of 2026, providing businesses with a clear transition period to prepare.

Core concept and operation of the regime

The UTPP regime is concerned with identifying profits that should have been included in a company’s tax return under the UK’s transfer pricing rules but were not. In simple terms, it targets situations in which transactions between connected parties have not been priced on an arm’s-length basis, resulting in a reduction of taxable profits in the UK.

Unlike standard corporation tax, however, the regime does not rely on self-assessment. Instead, it operates through a separate assessment process initiated by HMRC, meaning that a company will only be subject to UTPP if HMRC issues a formal assessment of unassessed profits.

A company will fall within scope where three conditions are broadly satisfied. First, there must be profits that have not been included in the tax return but should have been brought into account under transfer pricing rules. Second, the omission must lead to a tax advantage in the UK without a corresponding increase in taxation elsewhere, referred to as an “effective tax mismatch outcome.” Third, it must be reasonable to conclude that the arrangements were designed to obtain that tax advantage. This final point is rather subjective and could lead to protracted arguments with HMRC.

Definition of unassessed transfer pricing profits

The legislation defines “unassessed transfer pricing profits” as profits that are not reflected in a company’s self-assessment but would have been included if the arm’s-length principle had been correctly applied. This definition captures a range of scenarios, including cases where profits are understated, losses are overstated, or only a partial transfer pricing adjustment has been made.

The regime can therefore apply even where a taxpayer has attempted to comply with transfer pricing rules but has not fully aligned its pricing with arm’s-length standards. It can also apply in situations where incorrect pricing moves a company from a profit position into a loss position, effectively eliminating taxable profits in the UK.

Importantly, the scope of UTPP is limited to matters covered by transfer pricing legislation and does not extend to all forms of tax misstatement. For example, it does not apply to capital gains, as these fall outside the transfer pricing adjustment provisions.

Tax rate and key limits

A defining feature of the UTPP regime is the higher rate of tax applied to unassessed profits, which is intended to replicate the deterrent effect of the former Diverted Profits Tax. The applicable rate is calculated as the sum of the underlying corporation tax rate and an additional 6% surcharge.

This surcharge represents one of the key “limits” of the regime, in the sense that it establishes both a penalty and a ceiling on the additional tax exposure. While the regime does not create new profits or expand the tax base, it ensures that underreported profits are taxed more heavily than if they had been correctly declared in the first place.

Other important limits arise from the structure of the rules themselves. The regime is restricted to situations where there is a transfer pricing misapplication, meaning it does not apply to unrelated errors in tax computation. It also requires an effective tax mismatch, ensuring that cases where profits are simply reallocated between high-tax jurisdictions without a tax advantage are not targeted.

Scope and affected taxpayers

In practice, the UTPP regime is aimed primarily at large multinational groups, reflecting its origins in the DPT framework. Smaller businesses, particularly those that qualify as small or medium-sized enterprises (SMEs), are generally exempt from UK transfer pricing rules and therefore are not typically within scope of UTPP.

The SME exemption thresholds broadly follow EU definitions, covering businesses with fewer than 250 employees and limited turnover or balance sheet totals. However, HMRC retains the power to bring certain smaller businesses into scope where necessary, particularly if there is evidence of significant tax risk.

Administrative approach and HMRC powers

From an administrative perspective, the UTPP regime enhances HMRC’s ability to challenge transfer pricing positions. HMRC is able to raise assessments based on available information and, where necessary, make determinations on a “best judgement” basis if complete data is not provided.

The regime also seeks to address information imbalances inherent in multinational structures by encouraging early disclosure and engagement. Businesses are expected to cooperate with HMRC during enquiries, and assessments may be revised as additional information becomes available.

Conclusion

The introduction of the Unassessed Transfer Pricing Profits regime marks a fundamental shift in the UK’s approach to taxing diverted profits. By integrating anti-avoidance measures into the corporation tax system and applying a targeted surcharge to underreported profits, the UK has created a more coherent and internationally aligned framework for addressing transfer pricing risks.

With effect from 1 January 2026, multinational groups operating in the UK must ensure that their transfer pricing policies are robust, fully documented, and accurately reflected in their tax returns.

For more information on the regime or for other international queries, reach out to our International Team or contact us on 01903 234094.