HMRC internal manual

VAT Valuation Manual

VATVAL15300 - Transfer Pricing - VAT implications: Transfer Pricing (provision not at "arm's length") rules

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

UK Transfer Pricing rules apply, broadly speaking, where a UK business (which is subject to Income Tax or Corporation Tax) has a transaction with another business with which it is associated. Businesses are associated when one controls the other or both are under common control.

The rules work by adjusting the amount of profits of a business that is the subject of UK direct Tax on the basis of the “arm’s length” results of the relevant transaction. (Note that many transfer pricing methodologies do not arrive at a particular price for the goods or services supplied but rather determine an appropriate arm’s length profit margin for the relevant business). “Arm’s length” results are those that would have been expected if the businesses were independent of each other. The rules are applied on the basis of a “one way street”: that is to say, they are only applied in respect of a result where the outcome would be to increase the amount of the business’ profits or reduce the business losses arising for UK direct Tax purposes.

Transfer pricing rules apply even where there may be no transaction recorded in the accounts of the businesses concerned.

The international consensus of the ‘arms length’ principle is achieved by its inclusion at Article 9 of the Organisation for Economic Co-operation and Development’s Model Tax Convention (the ‘OECD Model Treaty’). The OECD is a discussion forum for member countries to compare policy approaches to a range of issues including taxation. It has developed a number of international standards including the Model Tax Treaty.

There is no set way for the ‘arms length’ provision to be calculated, as circumstances will vary widely. There are also no set records that an entity need keep to demonstrate the transfer pricing adjustment to taxable profits. However there will be classes of records including;

  • identification of transactions to which the transfer pricing rules apply - those with connected parties;
  • evidence demonstrating the provision of those transactions is at arms length, or the calculation of an arms length provision;
  • Records of adjustments to taxable profits in the cases where required.

One way for a Company to meet the requirements is for it to conduct all of its transactions at “arm’s length” provision, whether its customers are associated or not. Profits recorded in the accounts would, therefore, already reflect arms length transactions and no Transfer Pricing Adjustments would be necessary.

There are no separate ‘Transfer Price Adjustment’ pages on the Corporation Tax return (CT600). Entities have to make the computational adjustments to taxable profits if transactions recorded in their accounts are not at arms length.