HMRC brings in more certainty on UK Transfer Pricing Documentation requirements through responses to Public Consultation Process

In March 2021 HMRC conducted a public consultation which sought views and ideas for improving and updating UK transfer pricing documentation requirements for taxpayers. Frazier & Deeter’s Global Transfer Pricing team participated in the consultation process and submitted response to HMRC’s Consultation Document. HMRC has now published the summary of written responses it received and meetings it conducted and clarified the UK Government’s position on different aspects of UK transfer pricing documentation.

One of our main recommendations was that the OECD based Local File format should be adopted by taxpayers for disclosing their transfer pricing information. We are pleased that HMRC has positively considered our recommendation. HMRC in its response to the Consultation Document notes that the Master File and Local File represent best practice for transfer pricing documentation and would therefore encourage all taxpayers to adopt the OECD based Master File and Local File approach to transfer pricing.

Although HMRC is planning to implement mandatory maintenance of Master File and Local File only for large Multi-National Corporations (MNCs) in line with the OECD threshold i.e. consolidated group turnover Euro 750 mil and above, the above clarification may be considered as a guidance for smaller and medium sized business groups who are required to maintain transfer pricing information for different reasons e.g. requirement of filing UK transaction related transfer pricing information with non – UK tax authorities.

Further, our transfer pricing team suggested that, HMRC issue guidance on the format of transfer pricing records for the pricing of high value intangible transfers or licensing transactions. It is interesting to note that HMRC is now planning to introduce a ‘’Summary Audit Trail’’ requirement for Large MNCs which will include a concise document summarising the work already undertaken by the taxpayer in arriving at the conclusions in their transfer pricing documentation. One of the objectives of the Summary Audit Trail is to focus on higher risk areas during enquiries.

What to look for next

HMRC will be conducting further consultation on the above draft transfer pricing related legislation related to Master file, Local File and Summary Audit Trail in 2022. Further, HMRC also intends to issue practical guidance alongside any new legislation to support taxpayers in delivering appropriate transfer pricing documentation. Frazier & Deeter’s Global Transfer Pricing team will be actively participating in the future HMRC consultation process on this topic and will update on the developments in this space.

Our Thoughts

HMRC has collected over £6billion in additional tax from transfer pricing compliance activities over last 5 years [2015-2020]. This shows that transfer pricing continues to be a significant area of litigation risk for taxpayers and a major source of uncertainty for taxpayers. Considering that even a small or medium sized taxpayer may face enquiry or litigation on any high value intangible transfers from both UK and non – UK jurisdictions [where there may not be any de minimis threshold limit], it is important that all taxpayers plan and document transfer pricing policies in line with international best practices e.g. OECD based Local File as suggested by HMRC.  This will help the taxpayers to prepare in advance for any future enquiry or litigation on such transactions.

For more information contact:

Malcolm Joy

Jay Menon