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Managing compliance risk for UK businesses (part 1)

Published 10 September 2024

Who should read this part

Part 1 targets ‘UK risk leads and their associated group functions’. The responsibility of which is to manage transfer pricing compliance risk for UK businesses that are either within the scope of transfer pricing rules or are likely to be within scope in the near future. 

Why it is important 

UK businesses who do not manage and operate a clear and effective transfer pricing compliance framework may expose the business to significant compliance risk. A robust compliance risk framework should be designed to align with UK transfer pricing rules and consist of processes, checks and controls. 

This part aims to help UK business to reduce their risk of non-compliance by raising awareness of: 

• best practice approaches to timing and scoping of compliance work 
• common business change or trigger events requiring greater focus — as set out in part 1.1.3 (scoping compliance activity for developments since the prior period)
• the importance of the involvement of UK risk leads in the compliance process 

A number of statutory obligations linked to transfer pricing may also apply to UK businesses which include:

• Senior Accounting Officer (SAO) main duties — SAOG14100 to make sure that the company establishes and maintains appropriate tax accounting arrangements, including for transfer pricing
• declaration that the tax return is correct and complete to the best of their knowledge
• master and local file documentation requirements — read INTM450000 — Transfer pricing records for more information

These can carry penalties for non-compliance. 

The transfer pricing compliance lifecycle

Transfer pricing compliance is a cyclical process which is tested annually for UK businesses. UK businesses performing and evidencing the lifecycle phases of work on a timely basis and to an appropriate scope and depth benefit from:

• reduced risk of enquiry and penalties
• reduced risk of frequency and materiality of errors 

UK risk leads can play a role in managing transfer pricing risk within the lifecycle, without the need for technical knowledge of transfer pricing. The transfer pricing compliance lifecycle, comprises four main phases of activity: 

• 1.1 Compliance planning and scope 
• 1.2 Implementation and monitoring checks 
• 1.3 Transfer pricing analysis and documentation 
• 1.4 Filing an arm’s length return 

HMRC recognises that many groups either engage third party transfer pricing specialists or have specialist work conducted by non-UK group functions. 

This part shares best practice about the role of UK risk leads in engaging with specialists during the compliance lifecycle. These guidelines aim to help businesses make sure that work underlying and evidencing their filed returns, performed on their behalf is:

• timely 
• compliant 
• of appropriate depth 
• proportionate to risk 
• accurately reflective of the UK business 
• evidenced and documented 

UK risk leads may consider using the best practice examples from this part in their transfer pricing compliance risk approach.

The extent to which UK risk leads adopt best practice approaches will be influenced by: 

• the size and complexity of the business 
• level of inherent risk in group transfer pricing approaches adopted 
• group transfer pricing compliance model employed 
• materiality of transactions
• degree of business change 

1.1 Compliance planning and scope 

In HMRC’s experience, transfer pricing compliance risk can be created where UK businesses are not sufficiently involved, or do not give full consideration to, the upfront planning and scoping of UK transfer pricing compliance work for a given period.

This can result in transfer pricing policies, pricing, analysis and documentation that does not satisfy transfer pricing rules. This increases the risk of enquiry and where errors are identified, the risk of tax liabilities unprovided for in the accounts and penalties. 

Best practice approaches for effective UK transfer pricing compliance planning and scoping would typically include these upfront considerations: 

• understanding the group transfer pricing compliance model and its impact on level of UK assurance
• awareness of group transfer pricing policies and contractual terms of intra-group agreements and arrangements that apply to the UK business
• scoping compliance activity for:
  • developments since the prior period 
  • materiality, proportionality and depth
• building in implementation and monitoring checks to financial processes upfront

1.1.1 Understanding the group transfer pricing compliance model 

Groups adopt a range of different transfer pricing compliance models. These are processes by which work is scoped and performed to enable compliance with transfer pricing rules for the various jurisdictions where a group operates.

These guidelines are not intended to favour one approach over another. However, the approach adopted does influence the level of involvement, assurance and UK specific adaptations the UK risk leads may need to consider in areas such as the: 

• means by and extent to which the UK risk leads engage with the group transfer pricing compliance model and review outputs 
• level of UK localisation or customisation of group compliance approaches required to meet UK transfer pricing rules 
• scope and depth of work to be performed to comply with UK transfer pricing rules 
• level and frequency of implementation process controls and monitoring checks 

UK risk leads can make sure the compliance work plan scope is sufficient and accurately reflects the UK business. Influences on this process will include the extent to which: 

• specialist work is outsourced
• multi-territory compliance approaches are used
• group transfer pricing compliance model is controlled offshore 

We recommend as best practice, UK risk leads take the time to understand their group transfer pricing compliance model in these areas: 

• degree of ‘in-house’ or ‘outsourced’ compliance — by understanding whether transfer pricing policies, analysis and documentation, including local files, are prepared:
  • by a group tax team in the UK or overseas
  • through a specialist third party service provider 
  • through a combination of the two 
• ‘Country specific’ or ‘multi-territory’ compliance — by understanding whether transfer pricing policies, analysis and documentation, including local files, are prepared either: 
  • specifically for the UK
  • generically for use in multiple territories including the UK 
• ‘UK controlled’ or ‘offshore controlled’ compliance — by understanding where and by whom the decisions on scope and depth of compliance work are determined for the UK business 

Once understood, UK risk leads can then consider how the group’s model impacts the UK transfer pricing compliance plan for the period. We recommend you review the plan for inclusion of the following best practices: 

• the timing of planned transfer pricing analysis and documentation for the UK to maximise the opportunity to make any necessary corrections to transfer prices, to be reflected in the statutory accounts or tax return for the period
• a review for internal comparables (third party contracts for similar goods and services to the transactions to be priced) and documentation of findings is included within scope 
• group wide controls and checks are either in place or will be supplemented by UK controls and checks to make sure transfer pricing policies have been correctly implemented and issues flagged 
• any statutory audit risks identified that relate to UK transfer pricing will be flagged promptly to UK risk leads
• a clear channel established for UK risk leads to highlight developments during the period that may trigger reappraisal of the UK transfer pricing position, such as issues or trigger events identified through monitoring and checks in part 1.2 (implementation and monitoring checks)
• UK staff with the relevant operational knowledge of the UK business identified to provide facts and supporting information to specialists performing analysis and documentation 
• checks built in to allow for further work scope for any UK specific elements of analysis and documentation that may differ from the multi-territory generic standard
• access to information and staff in offshore related parties to transactions
• building in a review and sense check by UK risk leads prior to the submission of the tax return of the outputs of work either: 
  • outsourced to third party transfer pricing specialists
  • prepared by in house finance or tax teams

UK risk leads retain responsibility for ensuring that the scope of work outsourced to third party specialists is both sufficient in scope and depth as well as being accurate in terms of outputs reflecting the business. 

This is to minimise compliance risk arising from inconsistencies between the transfer pricing documentation and how the UK business operates.

1.1.2 Awareness of group transfer pricing policies 

Within groups, the terms of transactions within the transfer pricing rules are often documented in: 

• formal group transfer pricing policies
• intra-group contracts 
• informal written arrangements

Where these are set or controlled outside of the UK, compliance risk can be ‘built in’ through setting terms that do not reflect the profile and operating model of the UK business. 

Best practice for UK risk leads includes review of documented policies and terms governing transactions with the UK business with commercial or operational colleagues. Such sense checks include: 

• whether group transfer pricing policies, contractual terms and other written arrangements make sense commercially and are consistent with the way in which the UK business operates 
• whether, with your knowledge of the UK business, an independent enterprise would enter into a transaction on the commercial and financial terms outlined 
• whether in discussion with specialists any ‘high-risk’ policy design indicators, set out for specialists in part 3 (indicators of transfer pricing policy design risk) are present to identify any implications for UK compliance risk 
• highlighting to those setting the group transfer pricing policies or terms, any transactions between the UK and overseas group entities which are not included, for example: 
  • interest free intra-group balances 
  • goods, services or assets provided free of charge 

A thorough understanding of policies, intra-group contracts and written arrangement is vital when designing checks to deliver correct implementation.

1.1.3 Scoping compliance activity for developments since the prior period

HMRC considers best practice for UK risk leads to include steps to make sure any changes from the prior period, that may impact the scope of transfer pricing compliance are shared with specialists. Effective compliance planning involves both:

• identifying and understanding business changes
• informing in-house or third-party specialists 

Such changes might include: 

• new or changed transfer pricing policies set by the group since the prior period 
• trigger events that have occurred before the planning and scoping of current year work takes place, or that are known to be planned 
• commencement of new material intra-group transactions requiring a transfer price, or significant increases in value of existing transactions rendering them material for the first time 
• transfer pricing risks or errors UK risk leads are aware of relating to prior periods that may have continued into the current period 
• post balance sheet events that may need to be assessed for impact 

Scoping such developments into the transfer pricing compliance work plan for the period upfront both increases the probability that any resulting changes are made prospectively and limits the need for later pricing changes or adjustments.

To help UK risk leads, we have set out some of the most common business change trigger events. We recommend that specialists review the trigger events and identify where new or revised transfer pricing approaches are required. 

Common business change trigger events that may impact the UK transfer pricing position include:

• significant change to the scope or nature of intra-group goods and services provided to or from the UK, such as changes in channels to market or business functions 
• new third-party contracts for similar goods or services to the intra-group transactions
• merger, disposal, or consolidation of activities of UK entities following mergers and acquisitions activity 
• internal restructuring affecting the supply chain and group entities UK transacts with and associated financing arrangements 
• opening or closing of UK business locations or outsourcing of key functions 
• transfers of intangible assets such as intellectual property or rights to or from the UK 
• significant investment in in new tangible or intangible fixed assets that are not replacement capital 
• changes to UK based staff in senior global or regional strategic or leadership positions 
• changes to governance that alter the role of the UK in key decision making
• new or amended arrangements for the funding of UK R&D activities including cost share or cost contribution arrangements featuring changes to any of the participants, contribution or reward levels 
• growing intra-group payable or receivables balances on non-commercial terms 

This list is not exhaustive. 

Business change trigger events can also be useful in identifying developments during the accounting period relevant to year end compliance.

1.1.4. Scoping compliance activity for materiality, proportionality, and depth 

HMRC considers it insufficient to rely solely on third-party providers for UK compliance without ensuring the scope of work is appropriate, and outputs reviewed. Best practice steps for UK risk leads planning a transfer pricing approach for a period include: 

• planning an appropriate scope of work 
• working with specialists to identify areas requiring greater depth of analysis 
• ensuring material transactions are covered 
• making sure necessary staff and information sources are available, accurate and adequate 
• reviewing assumptions and outputs

Parts 1.3 (transfer pricing analysis) and documentation and 1.4 (filing an arm’s length return) are also relevant here.

We recognise that the scale and complexity of cross border transactions will vary for UK businesses. This determines the proportionality of their approach to transfer pricing compliance. 

To help UK risk leads, we have set out the most common areas where compliance risk or significant error can occur due to materiality. Our best practice recommendation is to conduct a greater depth of analysis and documentation in these areas:

• trigger events impacting transfer pricing approaches as set out in part 1.1.3 (scoping compliance activity for developments since the prior period) 
• transactions defined as material under master and local file guidance — read INTM450104 — materiality of a category of controlled transactions for more information
• transactions exhibiting ‘high-risk’ policy indicators that will attract additional scrutiny by HMRC (set out for specialists in part 3 (indicators of transfer pricing policy design risk) 
• transactions where the correct transfer pricing treatment has been debated with specialists 
• recurring intra-group transactions where the value of transactions of a similar nature (or ‘category’) is above UK entity financial audit materiality, for example, cost of goods, shared services or recharges

We recommend that greater depth of analysis is included in the compliance scope for these areas, and included in the documentation.

Services that meet the criteria of ‘low value adding’ under the transfer pricing rules may not need the same depth of analysis. UK risk leads should make sure that specialists can support the low value adding classification. 

Transactions not included on the list, to which the transfer pricing rules apply are still required to be priced in line with the arm’s length principle.

1.1.5 Building in implementation and monitoring checks upfront 

Transfer pricing compliance risk can be created through failure to correctly implement cross-border transaction terms set out in: 

• the formal group transfer pricing policy 
• intra-group contracts
• informal arrangements 

This is known as implementation risk. 

Best practice approaches involve upfront management of implementation risk by: 

• defining processes to be followed at a transactional level 
• monitoring adherence periodically 
• establishing controls and checks as part of financial reporting cycles 

Such an approach can provide these advantages:

• reduced risk of incorrect tax returns for which the accounts have no provision 
• reduced risk of errors identified under HMRC audit
• reduced need for pricing adjustments at a later date

1.2 Implementation and monitoring checks 

Compliance risk can be created where checks to make sure transfer pricing policies are implemented correctly are not performed. Risk can also arise where business changes impacting the transfer pricing position are not identified. 

To help UK risk leads to minimise such risks, this part sets out suggestions for best practice for: 

• 1.2.1 When to perform monitoring and checks 
• 1.2.2 Monitoring and checking that transfer pricing policies have been correctly implemented 
• 1.2.3 Identifying, monitoring and evidencing business changes
• 1.2.4 Identifying and retaining contemporaneous evidence of business change
• 1.2.5 Responding on a timely basis to issues identified

A number of factors impact the depth and frequency of implementation and monitoring checks. These include the scale and nature of the transactions and extent of existing control processes. UK businesses with high levels of business change may require higher levels of monitoring. 

1.2.1 When to perform monitoring and checks 

In practice UK businesses adopt a range of timings for monitoring and checking for implementation errors and business change:

• periodically during the accounting period
• as part of the year-end financial close process 
• after year-end financial close but prior to filing the return 
• after the return has been filed 

Periodically during the accounting period 

Performing monitoring and checks earlier in the accounting period allows for both real time analysis and prospective adjustment of transfer prices. 

This minimises the need for retrospective price changes at year end, that may have VAT or customs duty consequences. It also:

• allows for upward and downward transfer price changes in year
• facilitates the making of appropriate provisions
• enables adjustment to transfer prices to be reflected in both the accounts and the tax return
• allows for contemporaneous identification and retention of supporting information

Where changes as a result of checks are deferred until after the annual accounts are closed and only made as ‘computational’ adjustments in the tax return, downward transfer pricing adjustments that reduce tax profits or increase losses are not permitted.

This is due to a UK transfer pricing principle known as the ‘one way street’, for example if the UK were undercharged for a service from an overseas affiliate and this was identified, this could not be corrected.

As part of the year-end financial close process 

HMRC often see businesses performing implementation checks during year-end financial reporting process. This includes extending checks done during the accounting period to the full year. Checks actioned at this time:

• allow for upward and downward transfer price changes in year
• facilitate the making of appropriate provisions
• enable adjustment to transfer prices to be reflected in both the accounts and the tax return
• allows for contemporaneous identification and retention of supporting information

Where changes as a result of checks are deferred until after the annual accounts are closed and only made as ‘computational’ adjustments in the tax return, downward transfer pricing adjustments that reduce tax profits or increase losses are not permitted. This is due to a UK transfer pricing principle known as the ‘one way street’.

UK risk leads should note that:

• retrospective transfer pricing changes to cost of goods will partly impact inventory values rather than the profit and loss account
• checks using management or group accounts need to consider presentation of the profit or loss in the statutory accounts 

After year-end financial close but prior to filing the return 

Errors identified through monitoring and checks performed after the accounts have closed can still be corrected in the return. This facilitates the payment of the correct tax on time. Only upward adjustments to profit, or reduction in losses is permitted in the return. This is due to a UK transfer pricing principle known as ‘one way street’. 

Additional tax arising is unlikely to have been provided for in the accounts for the period as a result. Such adjustments cannot be processed through subsequent period accounts other than through prior period adjustments. Checks performed after the financial close but prior to the filing of the tax return also risk errors or incorrect pricing continuing into a subsequent period. This can result in adjustments to the transfer pricing position for more than one accounting period. 

After the return has been filed 

HMRC does not recommend that businesses defer conducting monitoring and checks until after the return is filed. Any errors identified at this point will:

• potentially impact several accounting periods 
• potentially be out of time to amend the return 
• raise questions regarding the signed statement that the return filed was correctly
• raise questions regards whether Senior Accounting Officer obligations have been met 
• affect penalty considerations 

We recognise that occasionally supplemental checks may take place at this time as part of due diligence processes for merger and acquisition activity or change of advisers. Proactively addressing historic compliance risk identified in due diligence is encouraged.

1.2.2 Monitoring and checking that transfer pricing policies have been correctly implemented 

Monitoring and checking the implementation of transfer pricing policies, intra-group contracts or informal arrangements is important for managing compliance risk. HMRC considers best practice for UK risk leads to include steps to make sure that:

• transfer prices achieve the margin set out in the transfer pricing policy or agreed terms
• invoices or recharges adhere to relevant terms
• calculation errors in invoiced or recharged amounts are avoided 

Monitoring to make sure that transfer prices achieve the margin set out in the transfer pricing policy or agreed terms

Under certain transfer pricing methods, transfer prices are established ‘up front’ by specialists to achieve a specific margin, or margin within a clearly defined range. The forecast profit and loss account for the year is used, to achieve margins identified as ‘arm’s length’. Such methods may include:

• defined gross margin based upon sales revenue (such as a resale price minus method)
• defined net operating margins based upon sales revenue (such as a sales-based transactional net margin method)

Where actual income and expenditure varies from forecast, this can result in a forecast margin outside of the acceptable arm’s length range identified by specialists. Best practice approaches will reforecast the anticipated gross or net operating margin for the accounting period. Typically, this is done periodically, linked to the financial reporting cycle. 

Variances can then be discussed with specialists to determine if any prospective correction to transfer prices is necessary. This will depend upon a number of factors including but not limited to: 

• the terms of the transfer pricing policy
• the cause of the margin variance
• whether such variance would be experienced in comparable companies that have been used to establish the arm’s length range
• the materiality of the margin variance outside of the range
• how close to year end the variance occurs
• seasonality

Where this is not possible such a check should be performed as part of the year end review and adjustments made prior to financial close. 

Monitoring that invoices or recharges adhere to relevant terms

HMRC recommends that those responsible for invoicing have visibility of any written terms applying to the transaction. Written terms may be contained in formal group transfer pricing policies, intra-group contracts or other informal arrangements. 

Best practice for risk leads to consider includes checks that invoices and recharges reflect terms relating to:

• counterparty to the transaction
• invoicing currency
• invoicing frequency — for example, monthly or quarterly
• payment due date for intra-group invoices and consequences of late payment
• mark-up or margin to be applied under the policy
• correct cost or revenue bases to be included in the calculation
• allocation keys used to share non-specific costs, indirect costs, or overheads 
• allocation keys used to share development costs or revenues under any joint or pooled ownership arrangements such as for intellectual property or other intangible assets
• date of commencement and cessation of income or expense streams 

Monitoring to make sure calculation errors in invoiced or recharged amounts are minimised 

HMRC frequently encounters errors that arise in calculating amounts invoiced or recharged under a group’s written terms governing transfer pricing arrangements. 

Best practice approaches for UK risk leads to consider include:

• documenting transaction calculations step by step for finance staff, such as processes for:
  • determining the cost or revenue bases for transfer prices
  • allocating non-specific costs to transfer pricing policies, for example, indirect costs and overheads
  • calculating recharges of cost pooling arrangements under cost sharing, cost contribution or research and development (R&D) pooling arrangements
• process automation with built in checks
• building in a check, review, or audit of the calculation by a competent member of staff or advisor, who did not perform the calculation
• sign off process for issuing ‘net’ invoices that may have different treatment for other tax purposes, for example, VAT, withholding taxes or customs duties
• ensuring staff and third parties who perform calculation are appropriately trained and or have the necessary skills and experience 

1.2.3 Identifying, monitoring and evidencing business changes

UK risk leads need to inform specialists handling compliance of business changes. This allows them to assess the impact on the transfer pricing position and reduce compliance risk. 

HMRC considers that best practice for UK risk leads involves monitoring for trigger events and business changes during the period. Timely identification of business changes better enables specialists to provide stronger compliance outcomes. 

Some common indicators of business change that UK risk leads may wish to watch out for include material changes to:

• headcount
• level or sources of revenue
• R&D expenditure incurred regardless of whether recharged
• fixed or intangible asset base
• debt to equity ratio
• operating expenditure relative to income

Common trigger events are set out in part 1.1.3 (scoping compliance activity for developments since the prior period).

1.2.4 Identifying and retaining contemporaneous evidence of business change

Contemporaneous evidence and records of business change are important for high quality analysis by specialists. Well documented and supported conclusions are more likely where these are available.

In HMRC’s experience UK businesses are best placed to identify and retain suitable evidence and records to support the filed return.

To assist UK risk leads, we have set out in Annex A, a non-exhaustive list of useful sources of information to help support their transfer pricing positions. 

1.2.5 Responding on a timely basis to issues identified

Addressing implementation issues identified through monitoring may involve specialists. Best practice for UK risk leads to make sure issues are appropriately actioned might include:

• raising trigger events with specialists and understanding the impact on, and risk for the UK’s transfer pricing position
• where monitoring issues are identified, ensuring specialists fully document conclusions to change transfer prices or leave them unchanged 
• where changes to transfer prices, or invoice correction is required:
  • discussing with specialists whether this may be possible during the period
  • if not possible, ensuring that it is on the radar for the year end process and correct filing position
• establishing a clear line of sight to transfer pricing risks flagged by financial auditors and ensuring they have been rectified promptly to limit penalty consequences
• ensuring specialists fully document conclusions as to new or revised transfer pricing policies or arrangements arising as a result of business change 

1.3 Transfer pricing analysis and documentation 

In HMRC’s experience, compliance risk can be created when the annual analysis and review to determine the final transfer pricing position is:

• insufficient in scope and depth 
• does not involve those knowledgeable of the UK business
• performed too late 
• supported by inadequate documentation 

HMRC wishes to support UK risk leads in enabling high quality final analysis and documentation by specialists. Best practice in this area is relevant to: 

• UK businesses preparing documentation such as a master and local file
• UK businesses exempt from preparing the master and local file but who are obliged to:
  • retain sufficient documentation to evidence the tax return is correct and complete
  • evidence the arm’s length return in the event of an enquiry 

Transfer pricing analysis and documentation best practice considerations which UK risk leads may wish to incorporate into their compliance approach, typically include:

• 1.3.1 Timing of final analysis and documentation by specialists
• 1.3.2 Sharing key relevant information, records and evidence with specialists
• 1.3.3 Review by UK risk leads of analysis and documentation outputs

1.3.1. Timing of final analysis and documentation by specialists 

Compliance risk can be created where transfer pricing analysis has not been conducted, and evidence supporting conclusions identified and retained prior to filing the return. In these circumstances there will not be the assurance for UK risk leads that the return is arm’s length.

The advantages and disadvantages of timing of compliance work set out in part 1.2 (implementation and monitoring checks) apply equally to final transfer pricing analysis and documentation.

HMRC strongly recommends that the analysis and supporting information be formally written up prior to filing. Postponing this until after the return has been filed will:

• render UK risk leads’ review of outputs for factual inaccuracies, key to filing a correct return, more difficult 
• impact the ability of those under master and local file requirements to produce documentation within the 30-day notice period and avoid penalties 

Performing analysis based on objective evidence after filing the tax return undermines a businesses’ ability to rely on certification that the tax return is correct and complete. This will inform penalty considerations where there is a transfer pricing inaccuracy in the tax return.

1.3.2 Sharing key relevant information, records and evidence with specialists 

In HMRC’s experience, the quality of analysis and documentation prepared by specialists is highly influenced by both the:

• agreed scope of work 
• level of insight and understanding of the UK business and its transactions

Best practice for UK risk leads involves sharing and discussing with specialists relevant information before the work commences. This includes supporting records and evidence on which they can base their analysis. 

This is likely to include details of any:

• implementation monitoring and checks planned into the compliance approach — for example, step by step process descriptions, documented invoice checks
• trigger events identified and relevant supporting evidence and records — part 1.1.3 (scoping compliance activity for developments since the prior period) and Annex A contain examples 
• transfer pricing implementation issues identified through checks or under audit and whether rectified
• material transactions requiring a greater depth of analysis and relevant supporting evidence and records — part 1.2 (implementation and monitoring checks) contains examples 
• obvious differences between the UK business functions and those of affiliates in other jurisdictions, where a multi-territory documentation approach is used 
• new transactions with third parties in areas similar to the transactions in scope that may inform pricing

Facilitating access by specialists to relevant people and information sources in the business is key to quality analysis. This may include functional interviews with staff who ideally have day to day experience of the UK business and possess a thorough understanding of how the relevant functions operate. 

1.3.3 Review by UK risk leads of analysis and documentation outputs

HMRC expects UK risk leads to review transfer pricing documentation outputs. You should check that documentation accurately reflects facts regarding the UK business and document the review. This can prove relevant to penalty considerations as part of any later enquiry.

Such reviews are especially important where the group compliance approach includes multi-territory transfer pricing reports. Standard content prepared for more than one territory may need customisation for UK differences.

HMRC understands that UK risk leads may struggle to identify how to gain comfort with technical work performed on their behalf. To assist UK risk leads HMRC has developed best practice suggestions that are:

• non-technical and common sense
• take account of the non-specialist background
• leverage UK risk leads business and commercial knowledge 

Review of functional analysis and conclusions

Functional analysis review necessarily involves those with a deep understanding of what the UK entity does. Reviews should be performed by UK risk leads or senior UK operational employees.

Facts relating to the UK business, its intra-group transactions and context should be checked. In performing a review of the functional analysis HMRC recommend that UK risk leads include checks that:

• descriptions of what the UK business does are accurate, complete and the wording clear
• important contributions by the UK business have been included and not downplayed
• descriptions of UK business activities that differ from a ‘typical’ affiliate or generic description have been included — for example, the UK entity employs leaders of regional and global functions
• the description of intra-group cross-border transactions is accurate, complete and the wording clear
• the report provides a clear understanding of business changes including trigger events since the last report — read part 1.1.3 for examples
• the report clearly states specialists’ conclusions as to the impact of business change on the UK transfer pricing position
• the description of what counterparties to the transactions do is accurate and complete and the wording clear
• the description of key risks reflects your risk registers and key risks in group accounts descriptions of how key risks are managed accords with your operational experience
• key facts, numbers or data provided by the UK business, are accurate and reflect the final numbers in statutory accounts such as:
  • revenues
  • costs
  • headcount
  • transaction values
• areas requiring greater depth of analysis are covered in sufficient depth to allow a full understanding — read parts 1.1.3, 1.1.4 and 2.2.6 for examples
• if local file applies, all areas suggested for greater depth of analysis due to their materiality are covered in depth
• descriptions of R&D or innovation functions match any submitted R&D or patent box claims
• potentially ‘high-risk’ policy approaches flagged by specialists have been addressed — read part 3 (indicators of transfer pricing policy design risk)
• the report includes analysis and the basis of conclusions where high-risk approaches have been deemed appropriate by specialists

Questions which UK risk leads might ask themselves in performing a review might include:

• is the description of what the UK business does accurate, complete and the wording clear?
• are important contributions by the UK business downplayed or not clearly explained?
• are there details omitted as they indicate the UK business is doing things which differ from the typical activities? — for example, the UK entity employs people whose responsibilities are global or regional rather than focused on the UK market
• is the description of intra-group cross-border transactions accurate, complete and the wording clear?
• does the report provide a clear understanding of business changes including trigger events since the last report? (read part 1.1.3 for examples)
• does the report clearly state specialists’ conclusions as to the impact of business change on the UK transfer pricing position?
• is the description of what counterparties to the transactions do accurate and complete and the wording clear?
• does the description of key risks reflect your risk registers and key risks in group accounts?
• does how key risks are managed accord with your operational experience?
• are key facts, numbers or data provided by the UK business, accurate and reflect the final numbers in statutory accounts? (such as revenues, costs, headcount, transaction values)
• are areas requiring greater depth of analysis covered in sufficient depth to allow a full understanding? (read part 1.1.3, 1.1.4 and 2.2.6 for examples)
• if local file applies, are all areas suggested for greater depth of analysis due to their materiality covered in depth?
• do descriptions of R&D or innovation functions match any submitted R&D or patent box claims?
• are statements relating to industry, sector norms or practices commercially realistic based on your industry knowledge?
• are any potentially high risk policy approaches flagged by specialist covered? (read part 3)
• where high risk approaches are deemed appropriate, does the report include analysis and basis of conclusions?

As a minimum, UK risk leads reviewing the functional analysis and conclusions should be looking to establish that it is:

• factually accurate
• complete
• clear 
• references supporting data and underlying work 
• is sufficient to allow HMRC to understand their filed position

This will ensure that the functional analysis and conclusions presented are sufficient to allow HMRC to understand their filed position without the need for significant further information. 

Review of pricing and benchmarking conclusions

HMRC recognises that UK risk leads are unlikely to be familiar with the technical practices of comparability analysis and benchmarking. Nevertheless, UK risk leads can ask valuable questions relating to the quality and completeness of the work undertaken on their behalf. This work may well have been performed by those unfamiliar with the UK business. Best practice suggestions for questions might include:

• has the review for any third party contracts for similar goods and services, that may help with pricing been documented? 
• have the grounds for rejecting third party contracts as a basis for pricing been explained? 
• have comparables or a means of pricing been established separately for each of the transactions described in the functional analysis?
• have comparables been updated to reflect any changes in the functional analysis from the prior period, or the same ones used as the prior period despite business change?
• do the business descriptions of the final comparable entities have any marked differences to your business? 
• does the list of final comparable entities include any of your known suppliers or customers?
• are there any obvious independent competitors conducting similar activities that could have been included? 

As a minimum, UK risk leads reviewing the pricing and benchmarking conclusions should be:

• looking to make sure prices or price ranges are established for all relevant transactions, including any business changes
• checking that any third party transactions of a similar nature have been flagged and considered as a basis for pricing 
• checking that the types of business selected as comparables make sense from a functional perspective 

1.4 Filing an arm’s length return 

Upon completion of the transfer pricing analysis and documentation UK risk leads will need to:

• understand whether the actual profits or losses for the period are arm’s length based on specialists benchmarking 
• assess with specialists whether an adjustment may be required to comply with the transfer pricing rules 

This part covers best practice suggestions to assist UK risk leads in avoiding common calculation pitfalls. It also sets out considerations to make sure relevant supporting information to support the return is retained: 

• 1.4.1 Calculation of the actual profit or loss under transfer pricing policies 
• 1.4.2 Giving effect to transfer pricing adjustments 
• 1.4.3 Preparing and retaining a supporting information file 

1.4.1 Calculation of the actual profit or loss under transfer pricing policies 

HMRC recognises that these calculations are often performed by specialists. But also, that staff with access to the financial records may provide or perform some or all the calculation.

Best practice approaches for UK risk leads to supporting the calculation of the actual profit or loss might include:

• avoiding common calculation errors — read part 2.4.1 (when to perform monitoring and checks) 
• providing the correct financial information to specialist that can be reconciled to statutory accounts
• highlighting to specialists: 
  • any material cost or revenues that have not been included in any transfer price or target margin calculation
  • where cost or revenue relating to a transaction are reclassified as exceptional or extraordinary within the profit and loss 
• ensuring separate calculation of profit and loss under each transfer pricing policy without double counting of revenue, cost or margin 

1.4.2 Giving effect to transfer pricing adjustments 

Unforeseen compliance issues and risks can arise as a result of how transfer pricing adjustments are given effect. To minimise this, HMRC recommends UK risk leads discuss these topics with specialists:

• whether any non-transfer pricing consequences arise in the UK or other jurisdictions from corrections to invoices or credit notes, for example, customs valuations where goods prices have altered 
• any plans to process adjustments through the accounts of a different period which can distort the transfer pricing profit or loss for that period and potentially create double taxation risk
• any plans to make adjustments which appear to reduce UK profits or propose to only adjust for net amounts of two offsetting adjustments

These may not be permitted under UK transfer pricing legislation and specialist input may be required.

1.4.3 Preparing and retaining a supporting information file 

In HMRC’s experience, compliance risk arises when details of the underlying work performed and supporting evidence sources are not documented. This should be retained at the time and made available for inspection in the event of an enquiry.

Demonstrating and evidencing the level of care taken to calculate the arm’s length return for filing purposes is also highly relevant to penalty determination. Read INTM483110 for guidance on penalties in transfer pricing cases and INTM483120 for 9 illustrative penalty examples.

HMRC recognises that identifying and locating evidence months or years after the work was performed can be resource intensive for UK businesses. Best practice approaches seek to evidence the filing position contemporaneously. 

HMRC recommends creating a ‘supporting information file’ to house information in a single location. An index of the file can be a helpful addition as an annex to transfer pricing reports, or in response to enquiry for UK businesses exempt from documentation. 

A supporting information file would include documents that were used and informed the final analysis and review and might typically include:

• final dated transfer pricing report or local file where produced, not to be backdated
• copies of key relevant information provided to specialists for use in conducting their transfer pricing analysis including: 
  • supporting documents and evidence
  • financial records
  • records of discussions with specialist or any questionnaires completed 
• documentation of review by UK risk leads of transfer pricing documentation outputs and corrections made 
• original interview notes where staff interviews used to establish factual information ensuring:
  • notes are written up and shared with interviewee 
  • interviewee confirms notes are an accurate and complete record
• documentation of implementation and monitoring checks performed or controls operated for the period 
• any issues identified as a result of corporate governance, including audits and risk committees and how resolved 
• information supporting the decisions on scope, depth and materiality of compliance work 
• audit trail tracing numbers included within the final transfer pricing report to statutory accounts

UK businesses that can readily provide relevant supporting information on request can expect earlier certainty as to any risks under enquiry. This can mean a more focused and less protracted enquiry process reducing compliance costs. Failure to produce information supporting their position will inform penalty considerations.

Annex A details suggestions as to useful relevant information, evidence and records to support the filed position.