HMRC approach to transfer pricing enquiries

Produced by Tolley in association with Anne Fairpo

The following Corporation Tax guidance note Produced by Tolley in association with Anne Fairpo provides comprehensive and up to date tax information covering:

  • HMRC approach to transfer pricing enquiries
  • The stage gate enquiry process
  • The transfer pricing enquiry stages
  • Stage gate 1: selection
  • Stage gate 2: progress
  • Stage gate 3: resolution

HMRC approach to transfer pricing enquiries

UK connected parties are required to self-assess their transfer pricing position when filing their tax returns by using what is known as the ‘arm's length principle’. Transfer pricing rules in the UK require that transactions between connected parties should be recognised for tax purposes by applying the amount of profit that would have arisen if the same transaction had been carried out by unconnected third parties. Where lower taxable profits or greater allowable losses would result from an actual transaction as compared to a calculation based on a theoretical arm’s length relationship, each entity will be regarded as an ‘advantaged person’. These advantaged persons are required to identify the relevant transactions and make transfer pricing adjustments when submitting their tax returns to HMRC.

Please refer to the Transfer pricing rules ― overview guidance note for further background on the UK transfer pricing regime and the types of transactions which may be caught by these rules.

In common with the general way HMRC approaches their relationships with large businesses, a risk assessment will be carried out to identify the potential transfer pricing exposure. HMRC will only seek to query the self assessment return where it is considered that there may be a risk of underpaid tax or overstated losses. It is not uncommon for HMRC to make initial transfer pricing queries outside of the formal enquiry framework, expressing their intention to raise more detailed queries at a later date. Subsequently, HMRC will open a formal enquiry within 12 months following the end of the accounting period to which the tax return relates. In essence, this allows HMRC a little more time to formulate their more detailed questions.

Any enquiries into the transfer pricing position of a group are usually led by the customer relationship manager (CRM), if one is assigned to the group, as well as the transfer pricing specialist and International Issues Manager working for the CRM. The Transfer Pricing Group consists

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