2025 could be a busy year for those dealing with transfer pricing in the UK. Here is our quick guide on the changes to look out for and how they might impact your business.

Overview of potential changes to transfer pricing 

• As previewed in the Corporate Tax Roadmap published at the Autumn Budget, the Government plans to consult on the following in Spring 2025:
  • reforms to the UK’s rules on transfer pricing, permanent establishment and diverted profits tax – including the potential removal of UK-to-UK transfer pricing, which would reduce the UK compliance burden;
  • changes to transfer pricing legislation, including potentially lowering the exemption thresholds for medium-sized businesses to align with international peers and manage risks to the UK tax base;  
  • introducing a requirement for multinationals within scope of the transfer pricing rules to report cross-border related party transactions to HMRC. This will enable HMRC to better identify transfer pricing risk and therefore allow for more targeted enquiries; and
  • reviewing the transfer pricing treatment of cost contribution arrangements where the costs and benefits of developing intellectual property are shared by group companies. The policy objective here is to provide certainty, so the rules do not act as a deterrent to investment that brings economic benefits to the UK. 

How will these changes affect your business?

• The UK-UK exemption: this exemption is unlikely  to apply in cases where it will provide a material tax advantage. Taxpayers should therefore monitor how the detail plays out to ensure they can benefit from a relaxation in the rules where possible.
   
• Lowering exemption thresholds for medium-sized businesses: if your organisation currently falls within the definition of a medium-sized business and qualifies for the SME exemption, we recommend monitoring this consultation closely. The Government has said that it will retain an exemption for small businesses. However, if the exemption threshold is lowered such that medium-sized organisations currently within the exemption fall outside it, their compliance burden for demonstrating that transactions are on arm’s length terms will increase (specifically, organisations will need to produce a transfer pricing report/local file in accordance with the latest OECD Transfer Pricing Guidelines). For reference, a medium-sized business is currently defined as a business with fewer than 250 employees where one (or both) of the following financial limits applies:
         (i) an annual turnover of less than €50m, or 
         (ii) a balance sheet total of less than €43m. 
   
• Cross-border related party transactions: this will increase the compliance burden for multinationals with related party transactions, so businesses with a large volume of related party transactions should ensure they are prepared for this increase in good time.
   
• Cost contribution arrangements: businesses should monitor any changes in this space especially if they develop intellectual property across their group.

Overall, this is a mixed package of reforms which will be helpful to some businesses (especially those with significant intra-group activity within the UK), while the direction of travel on cross-border transfer pricing and dealing with intangibles – an increasing source of complexity for multinationals – is set to continue. 

If you would like to discuss any of the points raised in this note, please get in touch.