Transfer pricing compliance – new HMRC guidelines

HMRC has published six documents that comprise its Transfer Pricing Guidelines for Compliance (TP GfC). They are intended to help UK businesses within the scope of transfer pricing rules to understand HMRC’s expectations, as they plan and implement transfer pricing compliance approaches. 

The UK already follows the OECD guidelines on transfer pricing documentation and has both legislation and HMRC manuals setting out the UK’s transfer pricing rules so why has it issued yet more guidelines? 

The answer is that HMRC’s Guidelines for Compliance initiative recognises that established guidance is not clear enough about what HMRC regards as best practice – it only sets out legal requirements and HMRC policy matters of technical interpretation. By providing best practice, examples of common errors and risk reduction recommendations, HMRC intends to help taxpayers get their compliance and record keeping right, with the ultimate aim of helping prevent errors before they happen and, thereby, help to close the tax gap. Transfer pricing is the seventh tax area for which GfC have been published.

While the object from HMRC’s perspective is to improve the standards of transfer pricing compliance, the good news for businesses is that if they follow these best practice guidelines, there should be far less risk of mistakes in tax returns and lengthy disputes if HMRC does choose to enquire into their transfer pricing arrangements. 

Contact us to discuss how to use the GfC to reduce your transfer pricing risk. 

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What’s covered? 

The guidance is intended to help the business, in-house specialists and their advisers to understand HMRC’s expectations through:  

• Practical end-to-end best practice guidance across a defined transfer pricing lifecycle 
• Content to help promote engagement across the business, finance and tax functions 
• Emphasis on the importance of evidencing timely analysis of sufficient quality 
• Examples of insufficient and unhelpful approaches, failures and common errors 
• Qualitative indicators of compliance risk. 

The guidance is presented across three parts: 

1. Managing compliance risk (aimed at UK “risk leads” responsible for tax) 
2. Common compliance risks (aimed at specialists covering planning, analysis and documentation) 
3. Design risks (transaction forms and approaches that HMRC view as high risk). 

Although lengthy, the GfC is written in a practical tone with little jargon and plainly sets out HMRC’s expectations. The general format of the guidance is to highlight things that HMRC sees in a good light and provide examples of poor practice. Mostly it does this using best practice approaches, with side-by-side commentary of issues and risks of alternative observed practices. For policy design risks, it sets out what HMRC sees as general risks and specific high-risk transaction forms and areas, with “high risk indicators” as well as guidance on risk reduction approaches. Here, high risk indicators are described as factors that, based upon HMRC experience, can result in enquiry compliance costs or transfer pricing adjustments for UK business.  

There are recuring scoping and quality themes throughout the TP GfC, in particular, encouraging: 

• A reasonable level of work is done to obtain facts in the circumstances 
• Facts to be reviewed by the business (accuracy, coverage, relevance etc.) 
• Meeting an evidential standard contemporaneously  
• Real time analysis 
• Localisation of multi-territory analysis 
• Functional interviews are performed with a focus on UK people functions 
• Performing new or refreshed analysis where appropriate 
• Frequent reviews to check roll-forward approaches are appropriate 
• Monitoring of business change or factors that call for a new policy, process or analysis 
• Process controls and frequent monitoring of pricing implementation to avoid error. 

What’s not included? 

This release covers transfer pricing fundamentals, providing a foundation for future specific topics to build upon. There are gaps in the guidance on specialised / complex areas including:

• Financial transaction (thin capitalisation and the pricing of debt), 
• Procurement models, 
• Profit split transactions, and
• Cost contribution arrangements. 

We understand that HMRC does intend to include additional topics in the future.

What should tax directors do now? 

While the TP GfC is not a list of mandatory requirements, it will be useful for businesses to know what HMRC sees as good practice. Those responsible for tax risk management within their organisation are likely to see the benefit in understanding HMRC’s expectation and areas for particular attention. 

Our Transfer Pricing team can help you get to grips with these best practice guidelines so that your finance and tax function stays on top of transfer pricing compliance risks. We recommend that all organisations take the guidance as an opportunity for reflection on their businesses annual planning, decision making and day-to-day compliance risk-management processes for transfer pricing.