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HMRC internal manual

International Manual

Transfer pricing: operational guidance: working a transfer pricing case: penalties


A penalty may be due:

  • if an incorrect return is made and a business has been careless or negligent in establishing the arm’s length basis for the return (CH80000 and EM4800).
  • if a business does not maintain the appropriate documentation necessary to demonstrate that it has made its returns on the basis that the terms of connected party transactions were considered to be on arm’s length terms (see CH11000 and INTM483030).

Guidance on penalties is in the Enquiry Manual (EM4500) and in the Compliance Handbook (CH81000) and CH400000.

Negligence and Carelessness

One of the main concerns of business in relation to transfer pricing and penalties is what is meant by ‘carelessness’ (or ‘negligence’, for penalties applying to accounting periods ending on or before 1 April 2009), given that to some extent what is an arm’s length price is a matter of judgement and there is frequently not one ‘right’ answer. Detailed guidance about what is meant by ‘carelessness” can be read in the Compliance Manual at CH81140 onwards.

At INTM483120 we provide a series of examples of possible situations which case teams may encounter when considering whether penalties should apply in transfer pricing enquiries.

Role of CSTD Business, Assets & International Transfer Pricing Team

A case should be referred to the Transfer Pricing Team in Business, Assets & International (BAI) by means of a special report immediately it becomes apparent that penalties may be in point and before the subject is raised with the business or its professional advisers. If BAI agrees that penalties are chargeable, advice will be provided on how to proceed.

If facts emerge unexpectedly during a meeting which indicate that a penalty may be chargeable, case teams must give the customer the Human Rights Act message and factsheet as set out in CH300700. Immediately after the meeting advice must be sought from BAI. The business must not be asked to provide more information, or reminded of outstanding information, until advice is received from BAI.