The spring 2025 consultation explores several reforms related to transfer pricing. Among others, these include removing the transfer pricing exemption for medium-sized enterprises; introducing a potential exemption for domestic transactions, and the introduction of an International Controlled Transactions Schedule (ICTS).
This consultation runs for 10 weeks from 28 April to 7 July 2025. If the changes become legislation, how will UK transfer pricing documentation requirements change?
Current transfer pricing documentation requirements
As of May 2025, there are four tiers of transfer pricing documentation requirements in the UK. The four tiers currently depend on thresholds which are based on group consolidated figures. These tiers are due to the mandatory documentation requirements for very large groups, and the small and medium-sized enterprise (SME) exemption.
Summary of the documentation requirements for each tier:
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Groups that are currently considered SMEs can be excused from preparing formal transfer pricing documentation (although medium-sized businesses can still be requested to provide documentation by HMRC). However, it's still considered prudent for these businesses to prepare intra-group agreements and policy documents. These documents won't constitute formal transfer pricing documentation, but they will provide support for transfer pricing policies and a basis for intercompany governance.
Medium-sized exemption may be dropped
The Government has proposed removing the medium-sized exemption. The exemption was introduced when domestic transfer pricing was legislated – to mitigate the impact of the UK-to-UK requirements. As per the spring 2025 consultation, domestic transfer pricing would now apply to a reduced number of groups. Therefore, since the UK is an outlier in having exemptions from transfer pricing, the Government is proposing to remove the medium-sized exemption.
The small enterprise exemption would be retained. The Government has explored changing the metrics for the small enterprise threshold either by focusing on a single metric or introducing a transaction-based test. However it has ultimately decided to retain the current definition subject to changing the currency from euros to sterling.
Current medium-sized groups are advised to draft policy memos, which can sometimes include a benchmarking analysis to support the pricing of the intra-group transactions. A benchmarking analysis is not the same as an economic analysis. The former is an analysis of comparables (internal or external) with which intra-group pricing can be benchmarked. An economic analysis includes a consideration of the delineation of risks, and control of risk, between related parties and a discussion on why a specific methodology was chosen to test and evidence the arm’s length nature of a transaction.
Guidance for large groups
For large groups, which aren't formally obliged to keep and preserve a Master File and UK Local File, HMRC views that an appropriate way to demonstrate that provisions between related parties adhere to the arm’s length principle is to still prepare documentation in line with the OECD’s recommended approach, ie, a Local File. At a minimum, a report should include functional and economic analyses.
A Master File is only required if the overseas jurisdictions in which a group operates have a lower documentation threshold than the UK. In the consultation, HMRC emphasised that record-keeping in relation to transfer pricing policies is expected, even though the requirement to prepare specific transfer pricing documentation is not met.
The mandatory UK documentation requirements for the largest groups aligns with the OECD’s standardised approach: Master File, Local File and Country by Country Report.
How transfer pricing documentation requirements might change
If the changes advertised in the spring consultation become legislation, the UK documentation requirements will be as follows:
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The other change to note is the potential inclusion of the International Controlled Transaction Schedule (ICTS).
The Government proposes a new requirement for certain businesses to report cross-border related party transactions data directly to HMRC. This information will be disclosed via the ICTS.
The only exemptions for completing the ICTS are:
- if the proposed small enterprise exemption applies
- if there are no transactions with non-qualifying territories, and
- if the aggregated total value of transactions (per UK entity rather than group) is <£1 million.
New ICTS: What to include
Helpfully, the consultation includes an illustrative template, and outlines the level and types of information that will need to be disclosed in the International Controlled Transaction Schedule. The ICTS (as currently drafted) is made up of four sections:
Thresholds
Gateway questions that determine which sections of the ICTS need to be completed.
Section A
Detailed disclosures in relation to an entity’s transactions with foreign related parties.
Section B
Disclosures in relation to financing related party transactions or dealings with balances greater than £5 million or impact on in-year profits is greater than £100,000, increasing to £50 million for smaller groups and £1 million for larger groups. Disclosures are also required in relation to the top five loan relationships or international related party dealings (without aggregation).
Section C
Disclosures in relation to group, industry, changes in transfer pricing policy during the period, etc.
The information required in Section A is granular in nature and includes the type of transaction, counterparty, jurisdiction of counterparty and quantum, for example. Importantly, groups will need to disclose the transfer pricing methodology applied (including profit level indicator) as well as the percentage applied under the particular transfer pricing model (eg, cost +10%).
While the guidance indicates that transaction types can be aggregated into a single line, this would only apply where they share the same features. Accordingly, transactions of the same type would need to be disclosed separately for different counterparties, or if a different transfer pricing methodology has been applied, for example.
Potential impacts for those in scope of ICTS
The format and content of the ICTS may be adjusted following the consultation but in our view, it's likely that the ICTS will be implemented in some form. If you fall within scope of the ICTS, consider taking steps to review your transfer pricing framework now to ensure that the policies you have in place are supportable in the context of peers and industry norms.
The proposed ICTS is set to create a material additional administrative burden for businesses with a level of detail beyond what many UK businesses were anticipating. The ICTS would capture dealings between a UK PE and other parts of the non-resident entity which goes beyond the information captured by many other major jurisdictions.
The information included in the ICTS would be used for automated risk identification and manual risk assessment by HMRC data analysis teams. It's likely that data mining techniques will be used to identify patterns, cross-referencing businesses to their peers and standardised norms. This is likely to lead to an increase in targeted transfer pricing enquiries, particularly for those businesses that, for whatever reason, are outliers with respect to the data set.
Timings
All transfer pricing documentation should be reviewed on an annual basis to ensure that there have been no significant changes during the year. You may also need to refresh (obtain new financial information for the final comparables) or renew (undertake a new search) your benchmarking studies.
HMRC has confirmed the 30-day timescale for providing documentation following its request for these. Documentation should also be prepared in advance of the filing of the tax return. Failure to prepare documentation in advance may lead to penalties.
What could the changes mean for businesses?
If documentation is continuously maintained rather than revisited periodically then it is more relevant to the state of the business and commercial reality.
The proposed changes could initially increase the compliance burden for newly in-scope groups and potentially lead to an increase in targeted transfer pricing enquiries. The rationale for removing the medium-sized exemption ultimately provides HMRC with a broader taxpayer base to enquire into. Coupled with the ICTS, there's a clear sense of direction being taken by HMRC.
Every group is different and faces its own transfer pricing challenges. Support varies enormously depending on where your organisation is positioned in its business life cycle, your industry and how you have structured your commercial operations. Transfer pricing might be a relatively new requirement, or maybe you simply need reassurance and validation that your policies are compliant and support positive commercial behaviour.
Get in touch with Kirsty Rockall if you would like to discuss how you can meet your transfer pricing requirements. ![tracking-pixel]()
