This article has been updated. It was originally published on 26 June 2023
Back in 2023, HMRC announced a consultation regarding potential reforms to three areas of UK international tax legislation: transfer pricing, permanent establishments, and diverted profits tax (DPT). HMRC has now published draft legislation to implement most of the proposals and is consulting on further simplification of the UK transfer pricing rules.
Who Does it Apply To?
The forthcoming changes will apply to all businesses that fall within the scope of the UK’s transfer pricing, permanent establishments, or DPT rules.
Key Changes
Transfer Pricing
The government has published draft legislation regarding pricing transactions between related parties to make the following changes:
- For the transfer pricing connected parties rules, slightly broadening the “participation condition” and giving HMRC discretionary powers.
- Overhauling the treatment of loan guarantees in the context of transfer pricing of financial transactions to bring the UK into line with the OECD rules.
- Intangible fixed assets regime – aligning the current approaches to pricing ‘market value’ and ‘arm’s length price’ to a single consistent approach across the legislation, which should make matters easier to understand and apply clearly.
Further new proposals now being consulted on include:
- A new requirement for to compile and file and “International Controlled Transactions Schedule” on an individual company basis for UK companies and non-UK companies with a UK permanent establishment. All transactions with non-qualifying territories (broadly a territory that does not have a double taxation agreement with the UK that includes a non-discrimination provision) will be reportable as would transactions with qualifying territories when the aggregate value of these exceed GBP 1 million a year.
- Removing the current UK-to-UK transfer pricing rules by creating a specific exemption for such transactions.
- Restricting the current exemption for small and medium-sized entities to ensure that all medium-sized entities are within the rules in future. On the current proposals, UK enterprises with more than 50 staff and a balance sheet total of over GBP 10 million or a turnover of over GBP 10 million would fall within the UK transfer pricing rules in future.
The mechanisms for how the new return would be prepared and submitted are not set out at this stage and various aspects are open for discussion. However, HMRC has published a draft ICTS template illustrating the level of information likely to be required, along with outlines of the proposed thresholds.
Permanent Establishments
The government has published draft legislation to amend the existing definition of permanent establishments (PEs) and the profit attribution rules to better align with tax treaties and the OECD model treaty. The amendments will:
- Update domestic legislation (Ch. 4 CTA 2009) to specifically align it with Article 7 of the OECD Model Tax Convention (supported by commentary and Authorised OECD Approach on profit attribution).
- Align the UK domestic definition of PE with the definition in Article 5 of OECD MTC. This will lower the UK’s current threshold for dependent agents by moving the definition from a person that “habitually exercises authority to conclude contracts” to a person who “habitually plays the principal role in leading to the conclusion of contracts.”
DPT
DPT is a freestanding anti-avoidance measure allowing HMRC to counter arrangements designed to divert profits from the UK. Draft legislation has now been published to bring it within the transfer pricing rules of UK corporation tax as "unassessed transfer pricing profit" (UTTP).
Under these new rules:
- Corporation tax would be charged on UTPP at a special 31% rate (the same rate as the current DPT regime)
- There would be no specific notification requirements for companies with UTPP, although it would continue to have a specific assessment process similar to the current DTP process
- Two gateways into a UTPP tax charge would apply:
- The Effective Tax Mismatch Outcome (ETMO) rule (from the current DPT legislation) - where 80% or less of the amount of the normal corporation tax that would be charged on profits has been paid, and
- Tax Design Condition – referenced as the new ‘Insufficient Economic Substance Condition’. This is a new broadly defined test that would be met if it is “reasonable to assume” that the provision and/or arrangements in question are designed to reduce, eliminate or delay the liability of “any person to pay any tax (including any non-UK tax)”. Given that this requires a company/group to make assumptions about what HMRC would see as “reasonable to assume” in this context it is clear that professional advice will be required on self-assessing potential UTPP tax charges.
Why is This Important?
While these reforms may yet take some time to finalise and implement, if they result in final legislation that corresponds more closely to current international principles and caselaw, that would be welcomed by many businesses.
However, great care will be required as groups get to grips with the new legislation to assess any implications for group structure and reporting requirements – for example, medium-sized businesses that may have previously taken only a very light touch to their potential transfer pricing record-keeping obligations.
Next Steps
The consultations will close on 7 July 2025.
Read the Transfer Pricing consultation
Read the draft legislation
The BDO TP and International Tax team is reviewing the proposed reforms in detail and assessing their potential impact as some of these aspects may extend beyond simplification and clarification.
If you have any questions or would like to discuss these UK changes, please contact your BDO transfer pricing or International Tax specialist.
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Ken Almand
Paul Daly
BDO in United Kingdom