Transfer pricing in the UK

These are the rules in force on 2 November 2026: Part 4 of the Taxation (International and Other Provisions) Act 2010, as amended by the Finance Act 2026 for chargeable periods starting on or after 1 January 2026, read with the OECD Transfer Pricing Guidelines and HMRC’s guidance.

What transfer pricing is

When two companies under common control deal with each other, the price they agree does not have to answer to the market. A UK company can pay an overseas parent too much for goods, or lend to it too cheaply, and profit leaves the UK. The transfer pricing rules put the price back where independent businesses would have set it, for UK tax.

When the UK rules apply

The rules apply where three things are true:

1. A provision is made between two persons, by a transaction or a series of them: a sale, a service, a loan, a licence, a guarantee.
2. The participation condition is met: one of them takes part, directly or indirectly, in the management, control or capital of the other, or the same person or persons take part in both.
3. The provision differs from what independent businesses would have agreed, and gives a UK tax advantage: lower taxable profits, or a larger loss, than the arm’s length provision would.

The advantaged party’s profits are then worked out as if the arm’s length provision had been made. The rules only ever work one way: they increase UK taxable profit or reduce a loss, never the reverse.

Who counts as connected

Control is the usual test, and it is traced through chains of companies. Two businesses that together control a company, each with at least 40% of the interests that give that control, are treated as connected with it too. From 2026 the test is wider: people under common management arrangements that align their economic interests are treated as controlling each other, arrangements with a main purpose of avoiding the condition are ignored, and HMRC can give notice treating the condition as met where it would be met under the OECD’s principles.

Small and medium-sized enterprises

Most small and medium-sized enterprises are outside the rules. The definitions follow a 2003 European Commission recommendation, with the figures of linked and partner enterprises, such as the rest of a group, added in:

The exemption does not apply:

• to a transaction with a party resident in a non-qualifying territory: broadly, one with no UK tax treaty containing a non-discrimination article;
• where the enterprise elects to come within the rules for the period;
• to a medium-sized enterprise given a transfer pricing notice by HMRC, which can follow only an enquiry, and can be appealed;
• to a small enterprise’s transactions that feed into patent box profits, if HMRC gives notice.

The government consulted in 2025 on removing the exemption for medium-sized enterprises, and decided against it. The exemption is unchanged.

Transactions between UK companies

For chargeable periods starting on or after 1 January 2026, dealings between two UK resident companies are exempt where both are charged to Corporation Tax on the profits at the same rate, use the same reference currency, and neither is in an excluded sector, such as banking, insurance, ring fence oil and gas or a real estate investment trust. A company can elect out, and HMRC can give a notice where the exemption would cause a net loss of tax.

Because the rates must be the same, a group in which one company pays the small profits rate and another the main rate should not assume the exemption applies. Where the rules still apply to a UK-to-UK transaction, the company on the other side can usually claim a compensating adjustment, within two years of the arm’s length return, so the group pays the same overall.

How an arm’s length price is worked out

The UK rules must be read consistently with the OECD Transfer Pricing Guidelines: the 2022 edition, as the OECD amends it from time to time. The Guidelines describe five methods:

• comparable uncontrolled price: the price in comparable transactions between independent parties;
• resale price, which HMRC calls resale minus: the price a reseller pays, worked back from its resale price less a comparable gross margin;
• cost plus: the supplier’s costs plus a comparable gross mark-up;
• transactional net margin: a net profit indicator of one party against comparable independent companies;
• profit split: the combined profit split by each party’s contribution.

The aim is the most appropriate method for the case. Where two are equally reliable, HMRC prefers a traditional method, and the comparable uncontrolled price in particular.

HMRC and the arm’s length range

Comparables give a range of results. A result inside the range needs no adjustment. For a result outside it, HMRC’s guidance says the median is usually the best point to adjust to. HMRC does not require the interquartile range. It accepts one where some comparability defects remain and there are enough results, but says statistics cannot fix a poor set: a few close comparables are better than many loose ones.

Our transfer pricing calculator works out the range from the comparables’ results, places a transaction in it, and shows the adjustment.

Loans, guarantees and services

Loans. Thin capitalisation is part of the transfer pricing rules. It asks whether a company borrowed more, or on worse terms, than it could and would have borrowed on its own, and interest on the excess is disallowed. The Corporate Interest Restriction applies after transfer pricing, to the interest that remains.

Financial guarantees. Since 2026, a related-party guarantee that lets a company borrow more than it could on its own is never arm’s length to that extent: interest and fees on the extra borrowing are disallowed. That applies to borrowing from 1 January 2026, and to older borrowing from periods starting on or after 1 January 2028. The support a company gets just from belonging to a group is not a guarantee, but is taken into account in pricing.

Services. For routine support services, such as accounting, IT support and HR administration, HMRC accepts the OECD’s simplified approach: the costs are charged at cost plus 5%, with no mark-up on pass-through costs, if the services qualify and the records show why. A flat 5% applied without testing to services that do not qualify may be treated as careless.

Records, reporting and penalties

Every business within the rules must keep records that show its related-party transactions were identified and priced at arm’s length. HMRC recommends the OECD format but does not require it below the large-group threshold.

Large groups, with consolidated revenue of €750 million or more, must keep a master file and a local file, for accounting periods starting on or after 1 April 2023. HMRC can call for them by an information notice, usually allowing 30 days. If they were not kept, a transfer pricing error in the return is presumed careless unless the business shows it took reasonable care.

The International Controlled Transactions Schedule is a new annual return of cross-border related-party transactions, planned for periods starting on or after 1 January 2027. The power to require it is in the Finance Act 2026. The regulations and HMRC’s notice, which will set the thresholds, were still in draft on 2 November 2026.

Penalties for an inaccurate return follow the usual scale: up to 30% of the tax understated for a careless error, and up to 70% or 100% for a deliberate one. HMRC’s guidance says an honest and reasonable attempt to apply the arm’s length principle usually leads to an adjustment without a penalty, even if a comparable later proves flawed.

Diverted Profits Tax and advance pricing agreements

For accounting periods starting on or after 1 January 2026, Diverted Profits Tax was abolished. It was replaced by a Corporation Tax charge on unassessed transfer pricing profits, at the company’s Corporation Tax rate plus 6%, which HMRC assesses where arrangements designed to reduce UK tax produce an effective tax mismatch.

A business facing real uncertainty can ask HMRC for an advance pricing agreement, which settles the method for future periods, usually three to five years. HMRC prefers bilateral agreements, made with the other country’s tax authority. Double taxation after an adjustment abroad can be taken to the mutual agreement procedure of the relevant tax treaty.

What we do

• Scoping: whether the rules apply at all, the SME tests with linked enterprises, and the UK-to-UK exemption.
• Functional analysis and benchmarking: what each company does, owns and risks, the method that fits, and a search for comparables, with the reasons written down.
• Records: transfer pricing documentation proportionate to the business, including master and local files for groups that need them.
• Year-end testing: whether each transaction’s result sits in the range, and any adjustment for the Corporation Tax computation.

If HMRC has opened an enquiry into the pricing, our sister practice Linx Tax Defence handles HMRC enquiries and investigations.