Open consultation

Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax

Published 28 April 2025

Summary

Subject of this consultation

This consultation on draft legislation fulfils the government’s Corporate Tax Roadmap commitment to further consult on reforming the UK’s transfer pricing, permanent establishment (PE) and Diverted Profits Tax (DPT) rules.

Scope of this consultation

The purpose of this consultation is to enable interested parties to make representations on the government’s proposed reforms to UK legislation on transfer pricing, permanent establishment and DPT.

As set out in the summary of responses to the 2023 policy consultation, stakeholders broadly agreed with the need for reform in these three areas. This consultation provides an opportunity for stakeholders to review the draft legislation to ensure it reflects the intentions of the earlier consultation and, where relevant, addresses any concerns.

Where there are particularly challenging issues, specific questions have been posed but the government also welcomes any general observations on the draft legislation for each area. 

Who should read this

All businesses within, or potentially within, scope of the UK transfer pricing, permanent establishment, or DPT legislation, advisory firms, representative bodies and legal firms.

These changes may also have relevance to certain businesses that currently fall within the small and medium-sized enterprise exemption from transfer pricing. That is subject to the outcome of a connected policy consultation- ‘Transfer pricing: scope and documentation’.

The government recommends that businesses review both consultation documents together, as a package of proposals on international tax reform.

Duration

This consultation will run for 10 weeks from 28 April to 7 July 2025.

Lead officials

The lead officials are Jennifer Buchanan, Paul Mitchell, Helen Steer and Nicholas Bright of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Please email responses to dpt-tp-pe-reform@hmrc.gov.uk.

We will also hold consultation events:

• 22 May 2025 – in-person only event at 100 Parliament Street, London (registration closes 14 May)
• 3 June 2025 – livestream event (registration closes 26 May)
• 18 June 2025 – livestream event (registration closes 10 June)

To register please complete this registration form before the closing date for your preferred event. 

Additional ways to be involved

Officials will hold a number of consultation events. Officials will also hold meetings with interested stakeholders who wish to discuss the proposals.

This is a technical consultation which is largely of interest to the tax profession, therefore officials will approach stakeholders likely to have an interest through established channels.

After the consultation

After the consultation closes the government will analyse and publish a response to the views expressed by stakeholders. These views will feed into the drafting of the final legislation, which the government intends to include in Finance Bill 2025-26.

Getting to this stage

The previous government consulted on proposals to reform the UK’s legislation on transfer pricing, permanent establishment and DPT in the summer of 2023. A summary of responses was issued in January 2024.

The proposals were broadly welcomed as an effort to simplify and update the UK’s international tax and closer align them with UK treaty obligations. Detailed feedback on the reform proposals was received from a wide variety of businesses, agents, and industry representatives. The government has sought to develop draft legislation to reform the rules in each of the three areas which reflects this feedback.

Previous engagement

During the 2023 consultation, stakeholders had the opportunity to respond to the reform proposals at consultation events and in writing. The government has engaged informally with affected groups where concerns were raised, or issues were more complex. This has allowed the government to ensure that the direction of the reform continues to meet expectations.

1. Introduction

International tax rules govern the taxation of cross border transactions and other economic relationships. With the increase in international commerce, international tax rules have grown in importance. This is true for tax authorities, who want to ensure that their domestic tax bases aren’t artificially eroded. It is also true for taxpayers who are concerned with the avoidance of double taxation.

Transfer Pricing (TP) is a means of pricing transactions between connected parties, based on the internationally recognised arm’s length principle. The arm’s length principle seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties. That principle is reflected in the UK’s double taxation treaties. It helps to ensure profits are taxed in the countries where activities giving rise to those profits are undertaken.

Corporation Tax (CT) is charged on the worldwide profits of UK resident companies, and the profits of non-UK resident companies insofar as they relate to business activities carried on in the UK through a permanent establishment. This is an internationally recognised standard that is reflected in the UK’s double taxation treaties. It is designed to ensure that countries only tax non-resident companies to the extent that they have a sufficient level of activity in their country.

DPT was introduced in 2015, DPT is a targeted measure that counters contrived arrangements designed to avoid profits being taxed in the UK. It is currently a standalone tax, though it borrows many of the principles of the transfer pricing and permanent establishment rules. If engaged, tax is charged upfront at a higher rate than CT. DPT’s procedural rules have also been successful in addressing the information imbalances that can otherwise exist between HMRC and taxpayers in complex and long running transfer pricing enquiries and has proved an effective tool in challenging profit diversion. It has helped settle or successfully bring to decision point long running enquiries and has so far secured over £8.5 billion.

All of these rules are important for HMRC as they seek to ensure that the appropriate amount of profit is taxed within the UK. They are also important to taxpayers who seek to get their tax affairs right. This is because the division of taxing rights across different jurisdictions can give rise to double taxation. The principles underpinning these rules which govern the allocation of profits between jurisdictions are based on internationally agreed standards.

The responses to the 2023 consultation supported the aims of reforming the transfer pricing, permanent establishment, and Diverted Profits Tax rules. Those aims are modernising UK law to ensure its application is clear to taxpayers and remains consistent with the underlying policy intention, international standards, and the UK’s tax treaties.

In the Corporate Tax Roadmap, the government committed to further consult on reforms to deliver these aims. The goal of this technical consultation is to seek views on whether the draft legislation delivers on the government’s policy intention.

This consultation document is divided into 3 sections, one for each aspect of international tax law. For TP and PE, the focus is on areas where the draft legislation represents a significant change, or the 2023 consultation proposals attracted particular comment. There is a more detailed explanation of the proposal to repeal DPT and create a new charging provision within Corporation Tax (CT) for Unassessed Transfer Pricing Profits (UTPP).

2. Transfer pricing

The government has developed draft legislation which is intended to simplify the application of Part 4 Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). The legislation also aims to update the rules in line with international standards, reduce compliance obligations on businesses, and address areas of potential legislative weakness.

Specifically, the proposed changes to the UK’s transfer pricing rules relate to:

• the participation condition
• UK:UK transfer pricing
• the interaction with the Intangible Fixed Assets rules at Part 8 Corporation Tax Act 2009 (CTA 2009)
• Commissioners’ sanctions
• interpretation in according with Organisation for Economic Co-operation and Development (OECD) principles
• financial transfer pricing

A summary of the proposed changes that would be implemented by draft legislation is provided below.

The participation condition

The participation condition needs to be met in order for the UK transfer pricing rules to apply. It determines whether persons are related/connected for transfer pricing purposes. The condition is stated at section 148 TIOPA 2010, with sections 157 – 163 TIOPA 2010 setting out how sections 148(2) and 148(3) TIOPA 2010 are to be interpreted.

Respondents to the 2023 consultation understood how the participation condition operated and thought it generally provided sufficient coverage. Radical changes were therefore not supported. However, stakeholders acknowledged that the existing rules may not catch all transactions that should be subject to transfer pricing. The following changes are therefore proposed to address those potential gaps:

• a new form of direct participation where 2 persons are subject to an agreement for common management
• an anti-avoidance provision ensuring participation when a person enters into arrangements with a main purpose of not meeting the participation condition
• a power allowing HMRC to issue a transfer pricing notice requiring a taxpayer with a return that is under enquiry to file on the basis that there is participation

The first change is to address situations where 2 entities have different shareholders, but those shareholders have agreed to deal with the affairs of both entities as if they were effectively one. This is a situation where transfer pricing should apply because the pricing of transactions between the 2 entities could be influenced by their common management. This change is intended to put beyond doubt that such arrangements are caught by the participation condition.

The second change will create a participatory relationship where taxpayers have entered into arrangements with a main purpose of preventing the creation of a participatory relationship. Where a company is sold for genuine commercial purposes, this test will not be met.

The final change will allow HMRC to issue a transfer pricing notice in situations where there would be participation under Article 9 of the OECD Model Tax Convention, but not under Part 4 TIOPA 2010. These notices cannot be used to create participation between 2 persons where there is clearly no related party relationship. They are intended to be used in rare occasions where the UK’s transfer pricing rules should apply but the participation condition has not otherwise been met.

The government considers that these changes will only create participation in a handful of scenarios where the position under the existing law is unclear. Most businesses will not be impacted.

Question 1: The government welcomes views on the proposed amendments to the participation condition, particularly whether the draft legislation will create participation in the intended scenarios.

UK:UK transfer pricing

The 2023 consultation sought views on the application of transfer pricing rules to wholly domestic transactions. Respondents generally recognised the need for transfer pricing to apply to transactions between UK entities where it was possible to achieve a tax advantage, for example, through rate arbitrage. However, they also highlighted concerns that UK:UK transfer pricing places an unnecessary compliance burden on businesses where no such tax advantage exists.

The government has drafted legislation that is intended to exempt domestic transactions between UK companies in scope of transfer pricing where there is no risk of tax loss. The exemption as drafted only applies to transactions between UK companies because there are arbitrage opportunities where one person is subject to CT and another Income Tax. There are fewer circumstances where transfer pricing would apply to 2 persons in scope of Income Tax.

The draft legislation introduces a general exemption from UK:UK transfer pricing where both persons are subject to CT, provided each person is taxable to CT at the same rate. However, this is supplemented by a list of exclusions to prevent opportunities for tax arbitrage. HMRC will also have the ability to issue a transfer pricing notice to disapply the exemption.

Taxpayers will be able to elect to apply transfer pricing should they wish to do so. This will provide flexibility for taxpayers to price domestic transactions on an arm’s length basis where it is beneficial to do so, for example, where it is more administratively convenient to continue to use an existing pricing approach applied under Part 4 TIOPA 2010.

An alternative exemption which tests whether a provision between 2 UK resident companies results in a UK tax advantage was considered. This was not taken forward because it would require taxpayers to consider the application of transfer pricing rules to determine whether they were exempt from them. This would still impose significant compliance burdens in many cases, which may include transactions with minimal tax arbitrage risk.

Question 2: The government welcomes views on the draft legislation relating to UK:UK transfer pricing. In particular, comments are invited on whether the proposed test will be simple to apply and the suggested exclusions (which include persons within the charge to Income Tax).

Interaction with Part 8 CTA 2009 (Intangible Fixed Asset Rules)  

The rules at Part 8 CTA 2009 govern the taxation of intangibles transactions between related parties. The interaction between Part 4 TIOPA 2010 and Part 8 CTA 2009 can be complex, with taxpayers required to consider both the market value and arm’s length price of an intangible.

The draft legislation intends to simplify the current rules and reduce the compliance burden on taxpayers by requiring one valuation standard to be applied. The arm’s length price will be used for cross-border transactions between related parties that are in scope of Part 4 TIOPA 2010. The existing market value or tax-neutral transfer rules will be retained in all other scenarios where transfers of assets remain within the scope of UK taxation.

Moving to a single valuation standard will also help to improve certainty for taxpayers. Advance Pricing Agreements can only determine questions under Part 4 TIOPA 2010. This means they can only provide certainty in respect of the arm’s length price, and not the market value. This change will allow these transactions to be fully covered by Advance Pricing Agreements.

The draft legislation retains the ability for adjustments to be made to either increase or decrease the price of acquired intangibles. This remains an exception to the broader ‘one-way street’ principle, which only allows transfer pricing adjustments to be made where there is a potential UK tax advantage. The one-way street continues to apply to licensed intangibles to maintain the status quo.

Question 3: The government welcomes views on the draft legislation which applies a single valuation standard to transactions involving intangible fixed assets, in particular whether the proposed changes will increase simplicity and certainty.

Commissioners’ sanction

Following feedback from the 2023 consultation, the government is confident that existing governance frameworks can be modified to provide appropriate oversight of transfer pricing determinations.

Therefore, the draft legislation removes the requirement for HMRC’s Commissioners to sanction transfer pricing determinations.

Question 4: The government welcomes views on the proposed repeal of the requirement for HMRC’s Commissioners to sanction transfer pricing determinations.

Interpretation in accordance with OECD principles

The draft legislation amends section 164(1)(b) to make it entirely unambiguous that Part 4 should be interpreted in accordance with OECD principles. This represents the existing legal position and is not a change in approach.

This amendment clarifies that the OECD Model Tax Convention and Transfer Pricing Guidelines (TPG) are interpretative aids regardless of whether there is a treaty in place.

Financial transfer pricing

Implicit support and guarantees

The government has drafted legislation that is intended to better align the UK rules for guarantees with the guidance at Chapter X of the TPG.

Sections 152 to 154 TIOPA 2010 currently prohibit any account to be taken of a guarantee when applying section 147 to a provision in relation to a security issued on a related party loan. For these purposes a ‘guarantee’ is widely defined at section 154. The 2023 consultation sought views on the rules on guarantees.

2023 consultation respondents suggested that the current legislation risks extending the definition of guarantee past its intended meaning to cover ‘implicit support’ from the wider group. The draft legislation provides a definition of implicit support and draws a distinction between implicit support and a formal guarantee.

Under the draft legislation, the implicit support that a borrower may receive from the group to meet its financial obligations is not considered a provision between those entities capable of being adjusted under section 147. This means that implicit support can always be taken into account when applying section 147 and the question of whether implicit support is arm’s length should not arise.

Guarantees that go beyond implicit support may also be considered when applying section 147, but such guarantees are themselves subject to that section.

A guarantee that lowers the rate of interest for a borrower may in principle be considered arm’s length. Such guarantees may or may not merit remuneration, depending on whether the benefit they provide to a borrower goes beyond that of implicit support. To the extent a guarantee increases the quantum of borrowing it will be considered inconsistent with the arm’s length principle.

Compensating adjustments

The proposed changes to the guarantees rules make consequential changes to sections 175 and 191 to 194 necessary to ensure alignment of practical outcomes with underlying policy intention.

The draft legislation relaxes section 175 to fully align with the new guarantees rules.

The draft legislation is intended to provide a clearer and more certain alternative to the current compensating adjustment mechanism at sections 191 to 194. The conditions for guarantors to make a section 192 claim have been updated to reflect the draft changes to the guarantees rules, which would otherwise restrict the range of persons able to make those claims.

The draft legislation also introduces a mechanism by which a UK resident company connected with a UK borrower can elect to be taxed as if a guarantee was provided for amounts of borrowing that would otherwise have been treated as non-arm’s length. This election mechanism is intended to enable excess borrowing capacity in other UK entities to be utilised.

The above changes to financial transactions will be introduced subject to commencement provisions. This is to avoid the burden on businesses of having to consider the impact of implicit support and guarantees on the pricing of all of their intragroup loan arrangements. The draft legislation sets out that the new rules will only apply to new or substantially amended provisions, rather than all existing debt. This will be subject to a long stop.

Question 5: The government welcomes views on the proposed amendments to the guarantees and compensating adjustments legislation. In particular, comments are invited on whether those changes increase clarity and alignment with Chapter X of the TPG, and whether any practical difficulties may arise from the changes to compensating adjustment claims, the election for section 192 claims, and the transitional provisions.

Acting together

The 2023 consultation sought views on the ‘acting together’ rules at sections 161 and 162. Stakeholders expressed concerns that the rules are overly broad and lack a definition of ‘acting together’, creating uncertainty. The government agrees that in their current form the rules can, and do, catch truly arm’s length debt.

The draft legislation simplifies these rules and reduces the possibility of arm’s length arrangements falling within the scope of UK transfer pricing rules. The uncertainty around the concept of ‘acting together’ will be addressed by drafting that targets instances where parallel equity interests influence the pricing of debt transactions.

The draft legislation introduces a rule which aggregates the equity holding of lenders to determine whether each participates in the management control or capital of the borrower. This rule will include:

• arrangements where existing equity holders make loans
• lenders who obtain an equity stake as part of the financing arrangement
• lenders who subsequently obtain an equity stake as part of an arrangement involving that existing loan

Question 6: The government welcomes views on the proposed changes to the acting together rules. Specifically, does the draft legislation clarify when borrowers and lenders are ‘acting together’?

Parts 5 and 7 CTA 2009

There are a number of complex interactions between Part 4 TIOPA 2010 and the loan relationships and derivative contract rules at Parts 5 and 7 CTA 2009. 2023 consultation respondents agreed that, while complex, the interaction with the loan relationships and derivative contract regimes is generally broadly understood. The government intends to make amendments to specific aspects of the interaction.

The draft legislation on the interaction between Part 4 TIOPA 2010 and the loan relationships rules amends the rules on the disapplication of the independent terms assumption at section 444 to 445 CTA 2009.

Further, the draft legislation protects the position of taxpayers in certain circumstances where a debit under the loan relationships or derivative contract regimes which would otherwise be disallowed under Part 4 TIOPA corresponds to an earlier credit which was not disallowed.

Question 7: The government welcomes views on the draft legislation relating to the loan relationship and derivative contract rules.

Foreign exchange changes 

The 2023 consultation sought views on the tax treatment of adjustments to foreign exchange gains and losses following the application of Part 4 TIOPA 2010. Many respondents agreed that these rules are complex and welcomed the proposal to simplify them, although a number noted that the current rules broadly achieved their aim and are well understood.

The draft legislation introduces changes to simplify the way the transfer pricing rules deal with the treatment of exchange gains and losses. As a result, the transfer pricing rules in Part 4 TIOPA will directly cover exchange gains and losses. The draft legislation ensures that exchange gains and losses from financial instruments that are part of certain hedging arrangements will not be disturbed by transfer pricing.

The government is considering a limited documentation requirement to accompany the foreign exchange rule changes and is looking closely at how this could be achieved. The template at Annex B to the connected policy consultation ‘Transfer pricing: scope and documentation’ contains a proposal for such a documentation requirement.

Question 8: The government welcomes views on the draft legislation relating to exchange gains and losses, including the new matching rules and the proposed documentation requirement.

Potential changes to transfer pricing that have not been taken forward

In light of stakeholder responses to the 2023 consultation, the government has decided not to proceed with changes to the meaning of ‘provision’.

The government considered better aligning the language used in the definition of provision at section 147 TIOPA 2010 with Article 9(1) of the 2017 OECD Model Tax Convention but considers that the existing terminology is well understood. Any potential areas of existing ambiguity will be addressed through guidance.

The government considered how best to clarify the interaction between the fiction imposed by sections 147(3) and (5) TIOPA 2010 and the computational rules which determine the ultimate charge to tax.

However, the government considers that the existing wording of sections 147(3) and (5) TIOPA 2010 are clear. Further guidance will be issued in due course to address any potential areas of ambiguity.

3. Permanent establishment

The government proposes to bring the UK’s permanent establishment rules into line with the latest international consensus on the definition of a permanent establishment and the attribution of profits to a permanent establishment.

This change would simplify and modernise UK law. It would also clarify which supporting guidance and materials can be used in conjunction with UK legislation to determine questions around PEs. Furthermore, the draft legislation would make it easier and quicker for the government to adopt changes in international consensus around PEs into UK legislation in future.

This reform does not affect the content or operation of any of the UK’s double taxation treaties.

The draft legislation amends Part 2, Chapter 4 CTA 2009, which deals with attribution of profits to permanent establishments, to make clear that relevant OECD documents can be used to interpret the ‘separate enterprise principle’.

Draft section 20(1B) includes specific references to the supporting OECD documentation which can be used to determine an appropriate attribution of profits. Those include the 2010 OECD Report on the Attribution of Profits to Permanent Establishments, commonly referred to as the ‘AOA’. This change has allowed for the repeal of a series of sections which were previously required to codify the same principles.

The statutory definition of a permanent establishment in section 1141 CTA 2010 has been updated to align it with the 2017 OECD Model Tax Convention. Section 1140A has been inserted to make clear the extent to which the new provisions can be interpreted in line with OECD documents on permanent establishment.

Question 9: The government invites comments on how the OECD guidance on the attribution of profits to permanent establishments has been incorporated into the draft legislation at Part 2, Chapter 4 CTA 2009 and section 1140A CTA 2010.

2023 consultation respondents raised concerns that the adoption of the 2017 OECD definition of a dependent agent permanent establishment (DAPE) might lead to a proliferation of small UK PEs with little or no tax arising. However, the existing domestic law definition of a DAPE is already noticeably broader than the pre-2014 treaty equivalent. Therefore, the draft legislation in this area does not expand the domestic law definition.

Previously the domestic test was whether ‘an agent has and habitually exercises their authority to do business on behalf of the company’. The new test is whether ‘a person acting on behalf of the company habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts, that are routinely concluded without material modification by the company’.

The government considers that a person who meets this new definition would also fall within the previous wording, which is very broad in scope. Additionally, any treaty definition would remain unaffected by this change. Therefore, the legislation has been drafted based on the 2017 OECD definition.

It should be noted that the revised draft permanent establishment legislation in section 1141(b) CTA 2010 does not match the wording in the OECD Model Tax Convention verbatim. This preserves the possibility, under UK common law, of a dependent agent arising in a case where either the agency or the principal is undisclosed.

Question 10: The government invites comments on the changes to section 1141 CTA 2010 in the draft legislation, including any practical or administrative consequences that are expected to arise from the proposed change to the definition of a DAPE.

As no concerns were raised during the 2023 consultation, we have proceeded with the repeal of the specific Lloyd’s agent exemption in section 1151 CTA 2010.

Question 11: The government invites comments on the repeal of the specific exemption for Lloyd’s agents at section 1151 CTA 2010.

Under current law, non-resident companies with no permanent establishment due to a test in Chapter 2, Part 24 CTA 2010 may remain in scope of Income Tax. The government proposes to change section 3 CTA 2009 to ensure that the trading income of such companies is excluded from Income Tax. This would give parity in treatment with companies whose profits are exempt from Corporation Tax for other reasons.

Question 12: The government invites comments on the extension of the exclusion from Income Tax to the UK trading income of non-resident companies with no permanent establishment.

2023 consultation respondents raised concerns about the impact on the asset management industry of moving to the latest OECD definition of a DAPE. The government recognises that this change will place greater strain on the Investment Manager Exemption (IME) which was always intended to be retained.

In response to this feedback, the government has critically reviewed the IME legislation to ensure that it remains fit for purpose. The proposed amendments to the IME legislation are intended to clarify its operation and to make it easier for taxpayers to apply. The key changes are:

• the removal of the ‘if, and only if’ construction to ensure the IME acts as a safe harbour and not as a mandatory alternative to the general agent exemption in section 1142 CTA 2010
• the revision of the scope of the IME to cover a wider range of investment transactions conducted by a fund
• the removal of Condition D, ‘the 20% test’, which has caused practical difficulties for taxpayers, and which does not serve a clear purpose as an indicator of independence
• the removal of the charging provision in section 1152, which serves no practical purpose in the absence of the 20% test

Question 13: The government invites comments on the definition of ‘investment transaction’ in the draft legislation, including whether any transactions or persons which would previously have been in scope have been omitted and whether any practical difficulties in applying the definition are anticipated.

Question 14: The government invites comments on the proposal to repeal the 20% test (formerly Condition D) and the charging provision in section 1152, including whether this would cause any practical difficulties to businesses previously in scope of the Investment Manager Exemption.

In line with revision of the IME legislation, the government intends to update Statement of Practice 1/01, which provides guidance on how to interpret the IME. The government recognises the importance of the Statement of Practice in providing certainty on the application of the IME. The government will continue to work with impacted stakeholders, including those in the asset management sector, on proposed updates.

A draft of this revised Statement of Practice has been published alongside the draft legislation. The most significant changes to the Statement of Practice are:

• several changes have been made to reflect the fact that the IME now operates as a safe harbour and not as a statutory alternative to the general agent exemption (paragraphs 15 and 55)
• an addition has been made to the introductory section to explain the potential impact of the revised definition of a DAPE on investment advisers who advise offshore investment managers. This additional guidance provides assurance that HMRC will treat investment advisers consistently when considering the existence of a potential permanent establishment and eligibility for the IME (paragraph 18)
• the section on the scope of the exemption, which previously referred to the Investment Manager (Tax) Regulations, has been revised to reflect the new statutory definitions of ‘investment transaction’ and ‘investment fund’. The revised Statement of Practice also provides assurance that no transactions have fallen out of scope as a result of the change (paragraphs 28 to 38)
• an addition has been made to the Condition C guidance to clarify that ‘qualifying funds’ under the Qualifying Asset Holding Companies regime meet the independent capacity test. This is the case regardless of whether they meet the widely held test (paragraph 46)
• the substantial services test in Condition C now applies at 50% rather than 70% to ensure that the IME does not exempt any funds which are not genuinely independent (paragraph 51)
• the substantial section of the Statement dealing with the application of Condition D, the 20% test, has been deleted to reflect the repeal of that Condition
• the analysis of the customary remuneration condition, Condition E, has been amended to correct any impression that a full transfer pricing analysis of the investment manager’s position is required to satisfy this Condition. Condition E is intended to capture cases where the reward to an agent clearly differs, to a material extent, from the reward commonly seen in such arrangements (paragraphs 56 to 74)

Question 15: The government invites comments on the draft amended Statement of Practice 1/01, including whether it is consistent with the draft legislation and whether businesses foresee any difficulties in applying the revised guidance in respect of Condition C.

The draft legislation includes some minor changes to the legislation in the Taxation of Capital Gains Act 1992. These changes are intended to simplify the law and better align the UK’s domestic treatment of gains attributable to permanent establishments with the treaty equivalent. They focus on whether the gain is sufficiently connected to the UK permanent establishment of the non-resident company.

Question 16: The government invites comments on the draft amendments to the capital gains rules for permanent establishments.

The draft permanent establishment legislation also contains a large number of consequential amendments to ensure that permanent establishment principles are consistently replicated in other parts of the Taxes Acts. Where necessary, they are aligned as closely as possible with the relevant treaty equivalent.

Question 17: The government invites comments on the consequential changes to other parts of the Taxes Acts in the draft permanent establishment legislation including any anticipated changes which appear to have been overlooked.

4. Diverted Profits Tax and Unassessed Transfer Pricing Profits

The proposal is for the creation of a new charging provision for UTPP within CT at Part 4A TIOPA 2010, which will retain the essential features of the DPT regime, and the withdrawal of DPT as a separate tax.

This will clarify the relationship between the taxation of diverted profits and transfer pricing, as well as providing clearer access to treaty benefits. Closer alignment with the CT enquiry framework would be a significant simplification and improve certainty for businesses and HMRC.

This legislation intends to clearly set out the link to transfer pricing principles as requested in the 2023 consultation responses. This approach would enable businesses to benefit from the UK’s treaty network features such as access to the Mutual Agreement Procedure (MAP) to remove double taxation.  It would further enhance the UK’s commitment to internationally agreed minimum standards for accepting cases into MAP.

Question 18: The government invites comments on the interaction between Part 4A TIOPA 2010 and transfer pricing in the draft legislation.

The legislation sets out how the UTPP assessment would interact with the CT framework this was an area of interest in responses to the 2023 consultation:

• CT is charged at the UTPP rate on unassessed transfer pricing profits instead of the main rate or any other rate
• there is no specific UTPP notification regime
• a UTPP assessment can be issued with or without a CT notice of enquiry, although HMRC will generally seek to open an enquiry where it is possible to do so
• where there is a notice of enquiry into a company tax return, a UTPP assessment can be used without impacting on the need for a final or partial closure notice in relation to the UTPP amounts
• the payment of the UTPP assessment cannot be postponed on any grounds except for tax suffered on the same profits
• there can be no reliefs, deductions or set offs of any description against the UTPP assessment. However, where a company amends its company tax return to include any previously unassessed transfer pricing profits, any reliefs, deductions, or set offs are available as normal

Question 19: The government invites comments on the interaction between Part 4A TIOPA and the CT framework in the draft legislation.

The legislation sets out how the UTPP assessment process would operate.  It seeks to maintain the framework from the DPT regime, including the use of preliminary and charging notices. A preliminary notice must be issued prior to a UTPP assessment. There would be a period for representations within 30 days of the preliminary notice being issued. A UTPP assessment could be issued up to 60 days following a preliminary notice. There would then be a period of amendments for 15 months.

A company could make an amendment to their self-assessment up to the last 21 days of the period of amendments. The UTPP assessment can only be amended by HMRC up to the last 30 days of the period of amendments. This reflects the 2023 consultation feedback that it would be helpful for businesses to have clarity on HMRC’s final position prior to the company’s amendment deadline.

HMRC would be unable to issue a CT closure notice in respect of profits subject to a UTPP assessment or related matter until after the period of amendments. This would ensure companies can use the relieving provisions to amend their self-assessment to include unassessed transfer pricing profits during this period. Following the period of amendments, the company would be able to appeal against the UTPP assessment.

Question 20: The government invites comments on the operation of the UTPP assessment process in the draft legislation.

The legislation sets out 2 gateways which must be met for UTPP to apply:

• the Effective Tax Mismatch Outcome (ETMO)
• the Tax Design Condition

The rules of these 2 gateways have been simplified considerably to improve their functioning.

The ETMO would be met for a provision between a company and a related party for an accounting period if the corresponding amount is less than 80% of the amount of CT that would be charged on the profits to which the unassessed transfer pricing profits relate.

The corresponding amount means the amount (which may be nil) of relevant tax due and payable by the other party and not refunded. The legislation reflects feedback that the ETMO should take account of the tax impact of two-way flow transactions, such as reinsurance transactions.

Question 21: The government invites comments on the functioning of the ETMO in the draft legislation.

Where the other party is a partnership, there may be difficulties in setting out the amount of tax that has been due and payable. The legislation proposes that the ETMO would be presumed to be met for such a provision and includes an additional 30 days for representations in these circumstances. This brings the total representation period to 60 days. This would ensure that the company is able to submit representations on the ETMO test prior to a UTPP assessment.

Question 22: The government invites comments on whether the legislation provides sufficient time for representations where the other party is a partnership.

The legislation renames the DPT Insufficient Economic Substance Condition (IESC) gateway test as the Tax Design Condition (TDC) taking account of the 2023 consultation responses. The TDC is now a single test. The TDC would be met if it is reasonable to assume that the structure of the provision to which UTPP applies, or the structure of arrangements of which the provision forms part, is designed to have the effect of reducing, eliminating or delaying the liability of any person to pay any tax (including any non-UK tax).

This ensures that the legislation focuses on the design of the provision and takes account of the 2023 consultation responses that the safe harbour provisions can be difficult to apply in practice. The government has not sought to directly include section 86 in the reformed legislation and believes that the majority of these arrangements can be targeted by the legislation as it stands, along with the reformed permanent establishment legislation.

Question 23: The government invites comments on the operation of the Tax Design Condition in the draft legislation.

5. Assessment of impacts

Summary of impacts

Year	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
Exchequer impact (£m)	Empty	Empty	Empty	Empty	Empty	Empty

Exchequer Impact Assessment

The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a future fiscal event.

Impacts	Comment
Economic impact	This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families	This measure is expected to have no impact on individuals as it only affects businesses.
Equalities impacts	It is not anticipated that there will be impacts for those in groups sharing protected characteristics. A full equality impact assessment is not recommended.
Impact on businesses and Civil Society Organisations	This measure will have a negligible impact on businesses who are currently in the scope of UK TP, PE and DPT rules – it will simplify the UK’s tax rules, bring those rules up to date, and align them more closely with the UK’s obligations under double taxation treaties. One-off costs could include familiarisation with the changes. Continuing costs for businesses should reduce and no additional administrative costs will be placed on businesses. This measure will have no impact on civil society organisations. Overall, this measure is expected to improve business’ experience of dealing with HMRC as the TP, PE and DPT rules will be simpler.
Impact on HMRC or other public sector delivery organisations	Some small changes will be required to HMRC IT systems, and that cost is currently estimated to be £770,000.
Other impacts	Other impacts have been considered and none have been identified.

6. Summary of consultation questions

Question 1: The government welcomes views on the proposed amendments to the participation condition, particularly whether the draft legislation will create participation in the intended scenarios

Question 2: The government welcomes views on the draft legislation relating to UK:UK transfer pricing. In particular, comments are invited on whether the proposed test will be simple to apply and the suggested exclusions (which include persons within the charge to income tax).

Question 3: The government welcomes views on the draft legislation which applies a single valuation standard to transactions involving intangible fixed assets, in particular whether the proposed changes will increase simplicity and certainty.

Question 4: The government welcomes views on the proposed repeal of the requirement for HMRC’s Commissioners to sanction transfer pricing determinations

Question 5: The government welcomes views on the proposed amendments to the guarantees and compensating adjustments legislation. In particular, comments are invited on whether those changes increase clarity and alignment with Chapter X of the TPG, and whether any practical difficulties may arise from the changes to compensating adjustment claims, the election for section 192 claims, and the transitional provision.

Question 6: The government welcomes views on the proposed changes to the acting together rules. Specifically, does the draft legislation clarify when borrowers and lenders are ‘acting together’?

Question 7: The government welcomes views on the draft legislation relating to the loan relationship and derivative contract rules.

Question 8: The government welcomes views on the draft legislation relating to  exchange gains and losses, including the new matching rules and the proposed documentation requirements.

Question 9: The government invites comments on how the OECD guidance on the attribution of profits to permanent establishments has been incorporated into the draft legislation at Part 2, Chapter 4 CTA 2009 and section 1140A CTA 2010.

Question 10: The government invites comments on the changes to section 1141 CTA 10 in the draft legislation, including any practical or administrative consequences that are expected to arise from the proposed change to the definition of a DAPE.

Question 11: The government invites comments on the repeal of the specific exemption for Lloyd’s agents at section 1151 CTA 2010.

Question 12: The government invites comments on the extension of the exclusion from Income Tax to the UK trading income of non-resident companies which do not have a permanent establishment.

Question 13: The government invites comments on the definition of “investment transaction” in the draft legislation, including whether any transactions or persons which would previously have been in scope have been omitted and whether any practical difficulties in applying the definition are anticipated

Question 14: The government invites comments on the proposal to repeal the 20% test (formerly Condition D) and the charging provision in section 1152, including whether this would cause any practical difficulties to businesses previously in scope of the Investment Manager Exemption

Question 15: The government invites comments on the draft amendments to Statement of Practice 1/01, including whether it is consistent with the draft legislation and whether businesses foresee any difficulties in applying the revised guidance in respect of Condition C.

Question 16: The government invites comments on the draft amendments to the capital gains rules for permanent establishments.

Question 17: The government invites comments on the consequential changes to other parts of the Taxes Acts in the draft permanent establishment legislation including any anticipated changes which appear to have been overlooked.

Question 18: The government invites comments on the interaction between Part 4A TIOPA 2010 and transfer pricing in the draft legislation.

Question 19: The government invites comments on the interaction between Part 4A TIOPA 2010 and the CT framework in the draft legislation. 

Question 20: The government invites comments on the operation of the UTPP assessment process in the draft legislation. 

Question 21: The government invites comments on the functioning of the ETMO in the draft legislation.

Question 22: The government invites comments on whether the legislation provides sufficient time for representations where the other party is a partnership.

Question 23: The government invites comments on the operation of the Tax Design Condition in the draft legislation. 

7. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

• Stage 1: Setting out objectives and identifying options
• Stage 2: Determining the best option and developing a framework for implementation including detailed policy design
• Stage 3: Drafting legislation to effect the proposed change
• Stage 4: Implementing and monitoring the change
• Stage 5: Reviewing and evaluating the change

This consultation is taking place during stage 3 of the process. The purpose of the consultation is to seek views on draft legislation in order to confirm, as far as possible, that it will achieve the intended policy effect with no unintended effects.

How to respond

A summary of the questions in this consultation is included at chapter 6.

Responses should be sent by 7 July by e-mail.

Telephone enquiries to 03000 570200 (Jennifer Buchanan), 03000 522610 (Paul Mitchell), Nicholas Bright (03000 579624) and Helen Steer (03000 529847) (from a text phone prefix this number with 18001).

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document in Welsh may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

Confidentiality

HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes.

These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection

Act 2018, UK General Data Protection Regulation (UK GDPR) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the Freedom of Information Act 2000, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs.

Consultation Privacy Notice

This notice sets out how we will use your personal data, and your rights. It is made under Articles 13 and 14 of the UK General Data Protection Regulation.

Your data

We will process the following personal data:

• name
• email address
• postal address
• phone number
• job title

Purpose

The purpose(s) for which we are processing your personal data is: ‘add the title of your consultation’.

Legal basis of processing

The legal basis for processing your personal data is that the processing is necessary for the exercise of a function of a government department.

Recipients

Your personal data will be shared by us with (provide details of recipients of the personal data, if applicable eg HM Treasury).

Retention

Your personal data will be kept by us for 6 years and will then be deleted.

Your rights

You have the right to request information about how your personal data are processed, and to request a copy of that personal data.

You have the right to request that any inaccuracies in your personal data are rectified without delay.

You have the right to request that any incomplete personal data are completed, including by means of a supplementary statement.

You have the right to request that your personal data are erased if there is no longer a justification for them to be processed.

You have the right in certain circumstances (for example, where accuracy is contested) to request that the processing of your personal data is restricted.

Complaints

If you consider that your personal data has been misused or mishandled, you may make a complaint to the Information Commissioner, who is an independent regulator. The Information Commissioner can be contacted at:

Information Commissioner’s Office
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

Phone: 0303 123 1113

Email: casework@ico.org.uk

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.

Contact details

The data controller for your personal data is HM Revenue and Customs. The contact details for the data controller are:

HMRC
100 Parliament Street
Westminster
London
SW1A 2BQ

The contact details for HMRC’s Data Protection Officer are:

The Data Protection Officer
HM Revenue and Customs
14 Westfield Avenue
Stratford
London
E20 1HZ

email:advice.dpa@hmrc.gov.uk

Consultation principles

This call for evidence is being run in accordance with the government’s Consultation Principles.

The Consultation Principles are available on the Cabinet Office website: Consultation Principles Guidance

If you have any comments or complaints about the consultation process, please contact the Consultation Coordinator.

Please do not send responses to the consultation to this link.

Annex B: Relevant (current) government legislation

Part 4 Taxation International and Other Provisions Act 2010

Part 2 Corporation Tax Act 2009

Part 5 Corporation Tax Act 2009

Chapter 2 Part 24 Corporation Tax Act 2010

Part 3 Finance Act 2015

Schedule 6 Finance Act 2019

Clause 27 and 28 Finance Act 2021