CREC056200 - Eligible expenditure: avoidance: connected parties and transfer pricing

Connected party transactions – sections 1179DU and 1179FM Corporation Tax Act (CTA) 2009 

The amount of expenditure credit to which a company is entitled in relation to a production is linked to the amount of relevant global expenditure incurred on the production. Relevant global expenditure is core expenditure that is not excluded expenditure. For a production to qualify for relief, the amount of core expenditure that is UK expenditure must be at least 10%. 

To prevent the size of the budget being distorted, where core expenditure includes expenditure on goods or services supplied directly or indirectly by connected parties, the rules at sections 1179DU and 1179FM CTA 2009 apply. 

These sections restrict the amount of relief available on expenditure on connected party transactions, unless the amount paid to the connected party is no more than the amount that would have been paid in an arm’s length transaction. 

If the amount paid exceeds what would have been paid in an arm’s length transaction, the connected party profit is treated as excluded expenditure. The connected party profit is the difference between the amount paid to a connected party to supply goods and/or services, and the cost to the connected party in supplying those goods and/or services. 

There is more detail on these rules at CREC052000. 

 

Transfer pricing – Part 4 Taxation (International and Other Provisions) Act 2010 

In applying transfer pricing rules, the UK observes the Transfer Pricing Guidelines issued by the OECD (`Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Organisation for Economic Co-operation and Development, Paris, 1995’). Such rules apply to film, TV and video game production as they do to any other sector of the economy. 

Paragraph 1.55 of the OECD guidelines addresses the impact of Government policies when determining the transfer price of transactions between connected parties. It makes clear that such Government interventions should be treated as conditions of the market and should be taken into account in evaluating the transfer price. Once this has been done, the question arises whether, in the light of these conditions, the transactions undertaken by the connected parties are consistent with transactions between independent enterprises.