Transfer pricing – documentation regulations released by HMRC

HMRC has now published draft secondary legislation that is intended to become ‘The Transfer Pricing Records Regulations 2023’. The proposed regulations set out the documentation required by large multinational enterprises (MNEs) and their UK entities to have prepared and retained in support of their transfer pricing policies for accounting periods starting on or after 1 April 2023.

Who does it apply to?

The regulations require taxpayers that are component entities of MNEs to keep certain documentation. This documentation must meet the requirements of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. An entity or group of entities is a large MNE where it has a taxable presence in multiple jurisdictions. It also has a consolidated turnover of €750m or more. This will therefore impact both large UK headquartered groups and UK subsidiaries and permanent establishments of large overseas parented groups.

Currently these draft regulations only apply to the largest taxpayers. However, in time we expect that the approach adopted will become the norm for smaller groups subject to UK transfer pricing legislation.

What is Changing?

UK law will, for the first time, mandate a standardized approach to transfer pricing. This makes it a legal requirement for groups to maintain the following documentation:

  • the master file covers relevant information common to and for the group as a whole, including an overview of the group’s business, the nature of its global operations, its value drivers, its overall transfer pricing policies and its global allocation of income and economic activity; and
  • UK local files set out, for each relevant material transaction involving the UK entity concerned, details of the transaction, the appropriate functional analysis, and an economic analysis supporting the transfer pricing methodology adopted.

Summary Audit Trail delayed

The Government has already held a consultation on transfer pricing documentation in 2020, and released draft legislation released in 2022. Despite this, the Government has decided that further consultation is needed before the additional requirement to produce a Summary Audit Trail (SAT) is introduced.

As part of the consultation on the draft regulations, we have emphasized the importance of giving businesses sufficient time to prepare for the proposed SAT requirements.

We envisage that the key driver behind the SAT will be for the taxpayer to certify that the necessary transfer pricing documentation has been prepared. Following that, then kept continuously up to date according to changes to the business. This will be retained, whatever form any new documentation takes.

It is well known that HMRC’s recent transfer pricing enquiry activities have resulted in the biggest ever yield for the Treasury (over £2 billion in 2020-2021). This coupled with the risk of tax-geared penalties, businesses that fall within these rules should think about undertaking a risk or gap analysis. This is to establish how they might need to alter their current policies.

If you would like any further advice, please contact a member of our Tax team on 01293 227670.