Exploring the latest transfer pricing changes
The UK government is introducing a significant overhaul of its transfer pricing framework, with most changes applying to accounting periods beginning on or after 1 January 2026, and new reporting requirements starting 1 January 2027.
Transfer pricing remains firmly under the spotlight for HMRC and overseas tax authorities. For businesses, it’s critical to stay on top of every aspect of transfer pricing - not just compliance and documentation, but ensuring alignment with operational substance and value creation across the group. Strong governance and robust controls around implementation are essential.
Over the past five years, global and geopolitical events have disrupted supply chains and increased workforce mobility. These changes make it imperative for transfer pricing and tax to be front and centre in maintaining compliance across global footprints. Transfer pricing also plays a vital role in preserving value during business exits.
The below are a combination of various reforms to the UK legislation on transfer pricing, permanent establishments and Diverted Profits Tax, along with updates to transfer pricing compliance and the scope of the UK transfer pricing legislation. These updates are as a result of various consultations that HM Revenue & Customs has led over the past 18+ months.
Summary of updates to be aware of
1. International Controlled Transactions Schedule (ICTS) confirmed
A new UK transfer pricing filing requirement will apply for accounting periods beginning 1 January 2027. The ICTS will require standardised disclosure of cross-border related-party transactions and will feed directly into HMRC’s risk-profiling systems. Further consultation is expected in Spring 2026.
2. Exemption for UK-to-UK transactions
From 1 January 2026, domestic transactions may be carved out of UK transfer pricing rules if they create no risk of UK tax loss. This approach reflects the pragmatic stance many groups already take.
3. SME exemption remains unchanged
The proposed reduction of the SME exemption (to “S” rather than “SM”) will not proceed. This is positive news for affected groups, although many still aim to align with the arm’s length principle due to overseas requirements or anti-avoidance provisions such as Profit Fragmentation rules.
4. Overhaul of financial transactions
Changes include recognising implicit support, election mechanics for guarantees, aggregation of equity holding lenders, and FX/derivatives treatment. This will include grandfathering provisions for existing loans for a period of two years to allow time for business to update arrangements where needed..
Other legislative changes
- Permanent Establishment (PE) alignment
The UK’s PE definition will align with the 2017 OECD Model (Article 7), with a revised Statement of Practice to follow. - Diverted Profits Tax (DPT) repealed
DPT will be replaced by a new Corporation Tax charge on Unassessed Transfer Pricing Profits (UTPP) from 1 January 2026. - The definition of the participation condition is also being updated, along with the single valuation standard for intangibles when looking at cross border transactions.
What does this mean for your business?
Now is the time to review your transfer pricing policies, governance frameworks, and operational alignment. Staying proactive will help you manage risk, maintain compliance, and protect value.
We’re here to help
If you have any questions on the alterations mentioned above, our specialist transfer pricing team is on hand to support and help you ensure your compliance strategy is robust and efficient. Get in touch via the form below to discuss your specific circumstances.
