HMRC’s Transfer Pricing Guidelines for Compliance (GfC7) are promoted as “best practice approaches to transfer pricing to lower risk and avoid common mistakes”. This may sound like helpful “take it or leave it” guidance, but it should be noted that the guidelines (as a form of guidance) form part of HMRC’s “known position” for the purposes of the uncertain tax treatment (UTT) rules. 

Taxpayers who are in scope of the UTT rules should look carefully at the guidelines to see if any deviations between what HMRC set out as “best practice” and their actual TP policy and practice could give rise to “uncertain amounts” that must be notified under the UTT rules to avoid penalties.

UTT rules

The UTT rules in Schedule 17 of Finance Act 2022 apply to large businesses, i.e., those with UK turnover above £200 million per annum and/or a UK balance sheet total over £2 billion. Where a company is a member of a group, its UK turnover and UK balance sheet totals are aggregated with other 51% subsidiaries and, if the aggregated amounts meet one or both of the thresholds, all companies within the group that are liable to UK corporation tax are in scope.

In-scope businesses must notify HMRC if one of the triggers applies in respect of any amounts (so as to make them “uncertain”) in corporation tax, VAT, PAYE and income tax self-assessment returns which have filing dates on or after 1 April 2022, unless an exclusion or exemption applies. One of the exclusions means that, broadly, no notification is required unless there is a tax saving of more than £5 million.

The legislation contains two alternative triggers for an amount to be uncertain: 

• where provision has been made in the accounts, and
• where the tax treatment applied is not in accordance with HMRC’s known position. 

It is the second of these triggers that is relevant here as it would apply where the amount of corporation tax shown in the taxpayer’s tax return relies on an interpretation or application of the transfer pricing rules that is not in accordance with the way in which it is known HMRC would interpret or apply the law. In such a case, the tax saving for the £5 million threshold would broadly be calculated as the difference between the tax due pursuant to the submitted return and the tax that would have been due had HMRC’s known position been applied.

There are escalating penalties for failing to notify under the UTT rules, ranging from £5,000 for the first failure, £25,000 for the second and £50,000 for a further failure.

The latest available compliance statistics show very few UTT notifications had been made up to the year ended 31 March 2024. Fewer than 5 notifications of divergence from HMRC’s known position had been made for corporation tax.

Transfer Pricing Guidelines for Compliance

Following the review of tax administration for large businesses, HMRC has been publishing a series of guidelines for compliance explaining HMRC’s view on complex, widely misunderstood, or novel risks that can occur across tax regimes. These guidelines include best practice examples to follow and steps to avoid non-compliance and they also “offer insights into the practical application of the law and HMRC’s administrative approaches, expanding the scope of HMRC material, beyond interpretation of the law.” The TP guidelines are the seventh in this series. 

The guidelines state that they do not represent any change in HMRC policy. They should be read with the legislation and the guidance in the International Manual.

The guidelines are in three parts. Part 1 “Managing compliance risk for UK businesses” is aimed at “UK risk leads and their associated group functions”. In order to minimise compliance risk from inconsistencies between the transfer pricing documentation and how the UK business actually operates, Part 1 emphasises that UK risk leads (those performing senior finance, risk and tax roles who are responsible for managing UK tax risk, accounting risk and filing tax returns) retain responsibility for ensuring that work outsourced to third party specialists is sufficient in scope and depth and that the outputs accurately reflect the business. 

Annex A to Part 1 sets out useful information, evidence and records to support the filed TP position. It provides examples of helpful records and evidence to identify and retain for common areas of fact-based analysis and following specific trigger events or business changes. HMRC recommends contemporaneous retention of supporting records and timely conduct of functional interviews, where required (e.g., before key staff leave the business).

Parts 2 and 3 are aimed at TP specialists (both in-house and external). Part 2 “Common compliance risks” highlights the issues which prevent HMRC being able to assess whether an arm’s length return has been filed. These include TP documentation which is too high level or which is insufficiently evidenced and where functional analysis is one-sided, rather than two-sided, in nature. Part 3 “Indicators of transfer pricing policy design risk” aims to help TP specialists identify high risk indicators of policy design and sets out best practice suggestions to reduce risk.

The standard of compliance HMRC sets out as “best practice” is relatively high, and it is likely that not all businesses’ current practice meets it. There is a lot of detail to work through in these guidelines and HMRC’s interpretation of what the TP rules (incorporating the OECD’s TP guidelines) mean in practice may not align with what some taxpayers are currently doing.

Action required 

In order to avoid penalties for failing to notify under the UTT regime, taxpayers within scope of the UTT regime should take a look at the guidelines and assess if there are any aspects of their current transfer pricing compliance that could be regarded as based on an interpretation or application of the transfer pricing rules that is not in accordance with the way in which it is known HMRC would interpret or apply the law.

If you would like any advice on the new guidelines, please contact me or your usual Slaughter and May contact.