INTM489150 - Unassessed Transfer Pricing Profits Conditions: Exceptions

UTPP will apply to accounting periods beginning on or after 1 January 2026.  This guidance will be updated with detailed examples by 1 January 2026.  For earlier accounting periods please use the diverted profits tax guidance at INTM489500

TIOPA10/S217C

TIOPA10/S166

There are two exceptions to profits which can be assessed under the UTPP rules:

1.     Excepted Loan Relationship Arrangements

Unassessed transfer pricing profits which arise from excepted loan relationships cannot be assessed for UTPP purposes.

In this context excepted loan relationships means:

  • any arrangements which would produce debits or credits under CTA09/Part 5 (loan relationships) which includes deemed loan relationships in CTA09/Part 6, or 
  • a loan relationship together with a ‘relevant contract’ within CTA09/Part 7 (derivative contracts), where the relevant contract is entered into entirely as a hedge of risk in connection with the loan relationship

The existence of a loan relationship, or loan relationships, within the provision that gives rise to the unassessed transfer pricing profits does not automatically mean that the outcome is excepted. The unassessed transfer pricing profits must arise wholly from the loan relationships(s) and/or hedging contract for the application of UTPP to be excepted.

Example

Company H is a UK resident company that has a group financing subsidiary resident in a low tax territory. The group financing company is a Controlled Foreign Company within the finance company partial exemption rules.

Company I (a non-UK resident company in the same group as Company H) requires debt funding for the purposes of its trade. For the last two years Company H has provided this funding through a long-term loan, but now arranges to terminate the loan early and injects equity into the group financing company which then on lends the funds to Company I.

Provision has been made or imposed as between Company H and the group finance company, which is effectively given the opportunity to lend its capital to Company I. There are unassessed transfer pricing profits on the basis that if Company H was dealing with an unconnected third party at arm’s length, then Company H would not have terminated the loan early and would continue to receive interest income.

However, this intragroup loan is a matter which is wholly within the excepted loan relationship rule. The unassessed transfer pricing profits are the interest income which is diverted from Company H and are therefore credits under CTA09/Part 5. Hence, the excepted loan relationship outcome rule means that this arrangement is not within scope of UTPP.

2.     Small and Medium-Sized Enterprises

Small and medium sized enterprises are generally exempted from the transfer pricing rules under TIOPA10/S166 (see INTM412070 onwards), so UTPP does not apply to them unless one of the exceptions apply or an election is made to disapply the exemption (where available).