Transfer pricing rules for UK groups
Transfer pricing in the UK: arm's length pricing, SME exemption and documentation thresholds.
UK transfer pricing rules require that transactions between connected parties are priced as they would be between independent parties — the arm’s length principle. They apply to UK companies in international groups and increasingly to genuine SMEs with overseas owners or affiliates, despite the often-misunderstood SME exemption.
The SME exemption — and its limits
UK transfer pricing in Part 4 TIOPA 2010 generally does not apply to small or medium-sized enterprises. The thresholds, measured at the worldwide group level, are:
| Size | Headcount | Turnover | Balance sheet |
|---|---|---|---|
| Small | < 50 | < £10m | < £10m |
| Medium | < 250 | < £50m | < £43m |
A business is exempt if it is “small” in either turnover or balance sheet, headcount must be met, and the rules can still apply where:
- The other party is in a non-qualifying territory (no tax treaty)
- HMRC issues a transfer pricing notice to a medium-sized entity
- The transaction is part of a diverted profits tax matter
What “arm’s length” looks like
You document the controlled transactions and benchmark them. Common methods include CUP (comparable uncontrolled price), TNMM (transactional net margin method) and cost-plus.
| Transaction | Common method |
|---|---|
| Group management charge | Cost-plus 5–10% on direct cost base |
| Intra-group loan | CUP based on third-party debt margins |
| IP licence to subsidiary | Royalty rate from comparables |
| Distribution arrangement | TNMM with operating margin |
| Shared services | Cost-plus or pure pass-through (rare) |
Documentation thresholds
From accounting periods starting on or after 1 April 2023, large multinationals (turnover above €750m) must keep an OECD-standard master file and local file. Smaller groups still need to demonstrate arm’s length pricing on demand and may face penalties for inadequate records.
- Maintain a transfer pricing policy signed off by the board
- Refresh benchmarking studies at least every three years
- Document significant intercompany agreements in writing
- File a CT600 disclosure noting any transfer pricing adjustments
- Reconcile intercompany balances monthly using the intercompany recharges routine
- Watch for diverted profits tax and Pillar Two interactions
Closing remarks
Transfer pricing should sit on the finance team’s risk register from the moment the group expands abroad. Pair this with our corporation tax CT600 filing article, the FRS 102 for UK SMEs guide, and the accounting for UK SaaS companies article for IP-heavy businesses. Cross-check with the HMRC International Manual on Transfer Pricing . See pricing for software with multi-entity intercompany support.