Compensating adjustments: scope
The transfer pricing provisions include a right to a compensating adjustment equivalent to the amount of transfer pricing adjustment on the advantaged person. Compensating adjustments only apply if the other party to the transfer pricing adjustment is another UK taxpayer. To qualify for a compensating adjustment, the other party to a transfer pricing adjustment (the disadvantaged person) must be within the charge to corporation tax or income tax in respect of profits arising from the relevant activities1.
It is important to note that even if both taxpayers pay UK tax at the same rate on both the transfer pricing adjustment and the compensating adjustment, this does not mean that a transfer pricing adjustment is unnecessary. To self-assess correctly, the advantaged taxpayer must make an adjustment that increases its profits. However, the other taxpayer can claim a compensating adjustment that decreases its profits by the same amount. Overall, the combined UK tax they pay may be unchanged.
HMRC make it clear that they will not authorise taxpayers to ignore the transfer pricing rules in circumstances where no additional UK tax is due. However, they also make it clear2 that they will adopt a risk-based approach to deciding which transactions to scrutinise. Transactions will be considered less risky where there is no net UK tax at stake, because, for example, both parties to the provision are subject to tax on the profits of the transaction at the same rate.
Further provisions have been added to the