HMRC release new best practice guidance for UK Transfer Pricing

On 10^th September HM Revenue & Customs (HMRC) released guidance on best practice approaches to transfer pricing to lower risk and avoid common mistakes, entitled: “Help with common risks in transfer pricing approaches — GfC7”. The HMRC guidelines are designed to provide clarity and transparency regarding compliance expectations. They are particularly relevant for businesses operating in the UK or with a presence in the UK, engaging in transactions that fall under UK transfer pricing legislation. The guidelines are structured to address the needs of different audiences, including risk leads, specialists, and in-house tax teams.

Managing Compliance Risk for UK Businesses (Part 1)

The first part of the guidance focuses on managing compliance risk. It emphasizes the importance of a robust compliance framework that includes:

• Compliance Planning and Scope: Businesses should determine the scope of their compliance activities, build governance structures, and establish controls and checks. This planning should be aligned with significant business changes or trigger events.
• Implementation and Monitoring: Regular monitoring and checks are crucial to ensure that transfer pricing policies are implemented correctly and consistently.
• Transfer Pricing Analysis and Documentation: Proper documentation is essential to demonstrate that transactions are conducted at arm’s length. This includes maintaining master and local files as may be required by HMRC.
• Filing an Arm’s Length Return: Ensuring that the tax return is accurate and complete is a statutory obligation. This step is critical to avoid penalties and reduce the risk of enquiries.

Common Compliance Risks (Part 2)

The second part of the guidance addresses common compliance risks and best practices to mitigate them. Key points include:

• Indicators of Higher Risk: HMRC highlights several indicators of higher risk in the compliance process, such as inconsistent documentation, lack of proper governance, and inadequate monitoring.
• Functional analysis: Undertaking and documenting  detailed functional analysis is critical, HMRC often encounters issues with:

• • Timing of functional analysis
  • Multi-territory functional analysis prepared centrally
  • Re-use or roll forward of functional analysis
  • Reflecting business change in functional analysis and delineation conclusions
  • Functional analysis — risk analysis
  • Functional analysis — intangibles
  • Evidencing people functions

• Comparability Analysis: Taxpayers need to conduct and document comparability analysis to a high standard, considering:

• • General comparability analysis documentation observations
  • Centralised comparability analysis
  • Reuse or roll forward of comparables
  • Common risks in comparability analysis

• Calculations and Adjustments: Implementation is crucial to ensure transfer pricing policies are accurately put into practice and result in the correct amount of tax being paid. HMRC have highlighted two areas that often required further attention:

• • Errors of allocation, apportionment and categorisation
  • Common risks in giving effect to transfer pricing changes and adjustments

• Best Practice Compliance Approaches: Businesses are encouraged to adopt best practices, including engaging third-party specialists, timely and appropriate scoping of compliance activities, and maintaining high-quality documentation.
• Supporting an Arm’s Length Return: Properly supporting and evidencing an arm’s length return is crucial. This involves detailed analysis and documentation to justify the pricing of transactions.

Indicators of Transfer Pricing Policy Design Risk (Part 3)

The third part of the guidance focuses on common risks in transfer pricing policy design and implementation. It covers several areas, including:

• General Risks in Policy Setting: Businesses should be aware of general risks in setting transfer pricing policies, such as failing to align policies with business operations and market conditions.
• Intangible Assets Ownership and Exploitation: Properly managing the ownership and exploitation of intangible assets is critical. This includes ensuring that the pricing of transactions involving intangible assets reflects their economic value.
• Above Market Intra-Group Services: Charging above-market rates for intra-group services can be a red flag. Businesses should ensure that the pricing of such services is consistent with market rates.
• Transfer Pricing Target Margin Models: Using target margin models can introduce risks if not properly managed. Businesses should ensure that these models are based on sound economic principles and reflect market conditions.
• Cost-Based Reward for Services: Cost-based reward models should be carefully designed to ensure that they reflect the value of the services provided. This includes considering the cost structure and market conditions.

Best Practices for Managing Transfer Pricing Compliance

To effectively manage transfer pricing compliance, businesses should consider the following best practices:

• Engage Specialists: Engaging third-party transfer pricing specialists or leveraging in-house expertise can help ensure that compliance activities are conducted to a high standard.
• Timely and Appropriate Scope: Performing compliance activities on a timely basis and to an appropriate scope and depth can significantly reduce the risk of errors and penalties.
• Involvement of UK Risk Leads: UK risk leads play a crucial role in managing transfer pricing risk. Their involvement ensures that the compliance framework is robust and effective.
• Maintain High-Quality Documentation: Proper documentation is essential to support an arm’s length return. This includes maintaining master and local files, as well as detailed analysis and supporting records.
• Regular Monitoring and Reviews: Regular monitoring and reviews of transfer pricing policies and compliance activities can help identify and address potential risks early.

Conclusion

Managing transfer pricing compliance is a complex but essential task for all UK businesses with controlled transactions and asset managers are no exception. The new guidance emphasises the importance of engaging specialists, not only in terms of understanding the transfer pricing rules but also in terms of the industry. As asset management specialists Larkstoke works with a wide range of businesses to design, develop and implement their transfer pricing policies.

The newly released HMRC guidance and best practice builds on guidance released previously, but does not fundamentally change UK legislation or the global OECD transfer pricing guidelines that the UK legislation incorporates. However, it does provide valuable practical support and examples for UK taxpayers seeking to reduce their compliance risks and ensure that their transfer pricing policies are robust and effective. Proper planning, implementation, and monitoring, along with high-quality documentation and specialist engagement, are key to achieving compliance and avoiding penalties.

For further detailed information, you can refer to the full guidance at: https://www.gov.uk/government/publications/help-with-common-risks-in-transfer-pricing-approaches-gfc7