At present, the United Kingdom is one of the few Western economies which does not require the companies to prepare mandatory transfer pricing (TP) documentation for tax purposes. However, in light of the latest developments, this may change in the coming months. Let us explain which will consist of the foreseen changes and how you can be prepared for them.

What is new about TP documentation requirements in the UK?

On 30 November, UK’s Financial Secretary to the Treasury presented to the Parliament the HMRC’s “Autumn 2021 Tax administration and Maintenance” command paper, announcing the introduction of tax legislation in 2022 to require businesses that are in scope of country-by-country reporting to maintain a transfer pricing master file and local file in line with OECD Base Erosion and Profit Shifting Action 13, and a supporting summary audit trail.

Additionally, the UK’s Government also published on the same date a summary of responses to the public consultation about the introduction of mandatory transfer pricing documentation requirements held since 23 March 2021.

What business will be obliged to prepare master file and local file in the new UK’s TP documentation requirements?

Mandatory TP documentation requirements are intended to affect those taxpayers who are in the scope of country-by-country reporting. This means that only companies belonging to groups with a consolidated annual turnover of €750 million or more will be obliged to prepare the master file, local file, and a supporting summary audit trail.

What information would need to be included in the UK’s TP master file?

The UK’s TP master file will be aligned with the OECD standard, so it is expected that the new legislation will introduce content like Annex I of Chapter V of the OECD’s TP Guidelines, which is also the basis for the legislation in most of the other jurisdictions.

The government will consider how best to assist those taxpayers preparing such documentation for the first time, in particular through updated guidance on transfer pricing documentation.

What information would need to be included in the UK’s TP local file?

The UK’s TP local file will be consistent with and build on the OECD guidelines at Annex II of Chapter V of the OECD’s TP Guidelines. However, it cannot be ruled out any specific requirement, such as the announced “summary audit trail” (SAT), which is explained in the next question.

Is any deviation of the OECD’s TP standard in the proposed UK’s TP documentation requirements?

Yes, the new TP legislation will also require a “summary audit trail” (SAT) which will be a “short, concise document” setting out the work that the business has undertaken in arriving at the conclusions in the local file/master file documentation.

The two-fold purpose of the SAT is (i) to increase transparency over how a business has conducted its transfer pricing analysis in order to encourage compliance, and (ii) to allow HMRC to assess the level of assurance the documentation provides so as to focus inquiries on higher risk areas. Businesses will be pleased that this option has been selected in favour of the onerous ‘Evidence Log’ approach that was considered in the consultation document, more suited to investigations than transfer pricing documentation.

Which transactions would be excluded in the TP documentation requirements?

UK-UK transactions will not need to be included unless there is a “material UK tax risk” (for example where entities benefit from Oil and Gas ringfencing).

Additionally, the government acknowledges the need for de minimis thresholds and intends to align with the OECD standards, including the focus on material transactions. Guidance will be published to help businesses determine what might be considered material, including practical examples and key principles.

Should the TP documentation be submitted to the HMRC at any specific date?

No, new UK legislation will require the master file and local file to be prepared, but only submitted to HMRC on request.

When must the company submit the TP master file and local file to the HMRC?

On request by HMRC, businesses will have 30 calendar days to provide their master file and local file documentation, including the summary audit trail.

The UK’s Government considers 30 calendar days, from the date of issue of the request, a reasonable timescale for the provision of existing documentation. The purpose of the master file and local files is to support the transfer pricing policies underlying the filed return and therefore should be prepared in advance of annual filing.

Will a transfer pricing reporting form be introduced in the UK?

No, UK will not implement, or consult further on, an International dealings schedule (IDS) or transfer pricing reporting form at the present time. This will be kept under review, but the government considers it essential that any future requirement would not create a disproportionate compliance burden for businesses.

When will the new TP documentation requirements enter into force?

The government intends to consult on draft legislation in 2022 to introduce a requirement for the largest customers to maintain and provide on request, master file, and local file documentation. These changes will take effect from April 2023.

The takeaway

As indicated by the published documents, in the 5 years (from 2015/16 to 2019/20) HMRC brought in over £6 billion in additional tax from transfer pricing compliance activities, demonstrating that transfer pricing continues to be a significant area of risk for HMRC and a major source of uncertainty for businesses.

The announced introduction of TP documentation requirements will not be a significant change for many groups (which are preparing TP documentation in other tax jurisdictions they operate), but it brings UK’s TP documentation in line with the OECD standard and leverages the playfield for further scrutiny of the transfer pricing policies applied in cross-border transactions in general, and not only focussed on “profit diversion structures”.

The new tax rules will introduce compliance with the Arm’s Length Principle and the Transfer Pricing Compliance in the agenda of the UK’s tax managers and directors as a day-to-day issue.

About Transfer Pricing Specialists (TPS)

Established in 2010, Transfer Pricing Specialists (TPS) is an international transfer pricing practice with offices in London (UK), Madrid (Spain) and Athens (Greece), serving clients in a wide range of industries on a worldwide basis. Currently, TPS is a leading transfer pricing practice recognised in the TIER1 of the World TP ranking published by the International Tax Review (ITR).

For further information on how the new TP documentation requirements may affect you, please do not hesitate to contact us: