Kirk Rice Blog

What is transfer pricing? How it works and the UK rules explainedWritten on September 27, 2026 by Kirk Rice LLP

• Transfer pricing refers to how prices are set for transactions between connected companies, particularly within international groups.
• UK transfer pricing rules require transactions between related parties to be priced as if they were agreed between independent businesses.
• The rules can apply to both cross-border and, in some cases, UK-to-UK transactions depending on the circumstances.
• Getting transfer pricing wrong can lead to tax adjustments, so understanding when the rules apply is important for compliance.

What is transfer pricing?

Transfer pricing is the process of setting prices for goods, services, or intellectual property transferred between companies that are part of the same group.

Because these transactions take place between connected parties, they are not always negotiated in the same way as third-party deals. Tax authorities, including HMRC, expect these prices to reflect what would have been agreed between independent businesses.

This is known as the arm’s length principle, which underpins UK transfer pricing rules.

How does transfer pricing work?

Transfer pricing works by comparing transactions within a group to similar transactions between unrelated businesses. This typically involves:

• Identifying the transaction, such as a service, loan, or sale of goods
• Analysing the roles and risks of each party involved
• Benchmarking against comparable third-party arrangements

The goal is to demonstrate that the pricing used is consistent with market conditions.

Where HMRC considers that pricing does not reflect an arm’s length position, it may adjust the taxable profits of the UK entity.

When do UK transfer pricing rules apply?

UK transfer pricing rules generally apply where there are transactions between connected parties that could affect taxable profits. This is most common in:

• International groups with UK subsidiaries
• UK companies transacting with overseas parent companies
• Groups where intellectual property, financing, or services are shared

Some small and medium-sized businesses may be exempt from the full UK transfer pricing rules, although this depends on specific criteria and exceptions.

Even where exemptions apply, it may still be important to consider how transactions are priced.

For more detail on how these rules apply to UK subsidiary companies, including documentation requirements, see our blog on UK transfer pricing for UK subsidiaries.

Does transfer pricing apply to UK-to-UK transactions?

Transfer pricing is often associated with cross-border transactions, but it can also apply to UK-to-UK arrangements in certain circumstances. However, as part of a significant reform of the UK’s international tax framework, the government introduced an exemption for most domestic (UK-to-UK) transfer pricing arrangements for chargeable periods beginning on or after 1 January 2026.

Is transfer pricing legal?

Yes, transfer pricing is a recognised and legitimate part of how group businesses operate.

The key requirement is that transactions are priced in line with the arm’s length principle. Issues arise where pricing is used to shift profits in a way that does not reflect commercial reality.

Tax authorities focus on ensuring that profits are taxed in the appropriate jurisdiction based on the underlying economic activity.

When should a business take advice on transfer pricing?

It may be worth taking advice on transfer pricing where:

• You are part of an international group
• There are transactions with overseas connected parties
• Financing, intellectual property, or shared services are involved
• The structure or scale of the business is changing

Why Kirk Rice for transfer pricing?

Kirk Rice advises businesses on how transfer pricing rules may apply in practice and how to approach them with clarity.

This includes helping you understand whether the rules apply, reviewing existing arrangements, and helping you understand what documentation may be required.

Transfer pricing can become more complex as businesses grow or expand internationally. Taking advice can help you understand your position and reduce the risk of unexpected adjustments.

If you would like to discuss your situation, contact info@kirkrice.co.uk

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.