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HMRC internal manual

VAT Valuation Manual

Transfer Pricing - VAT implications: compensating adjustments and Balancing Payments

Most international double Taxation treaties, including all those that the UK has agreed with its major trading partners, contain Articles supporting the “arm’s length” principle for transactions between associated enterprises and allowing for adjustments to be made by mutual agreement to secure taxation in accordance with the treaty.

For transactions between two associated UK businesses, there is a corresponding adjustment that does not depend on the terms of an international treaty. A UK business can reduce its profits liable to UK direct Tax in respect of a transaction with an associated UK business where the profits of that other business have been increased as a result of a Transfer Pricing Adjustment.

Moreover, where there has been such a Transfer Pricing Adjustment, a Balancing Payment may be made between the two businesses with no direct Tax consequences to keep the cash position in line with the position in the accounts.