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Kirk Rice Blog

UK Transfer Pricing for UK Subsidiary CompaniesWritten on November 29, 2023 by Kirk Rice LLP

In this article, we consider how transfer pricing rules can affect UK subsidiary companies of overseas groups.

When incorporating a subsidiary in the UK, it is necessary to consider the nature of the services that will be provided both by and to that company and how these services should be charged. Typically, this includes administrative services between the companies, intra-group financing and stock transfers.

In the UK, companies within the transfer pricing rules are required to transact with related entities at an arms-length rate, and the UK transfer pricing rules follow the OECD Guidelines. There are a number of different types of transfer pricing methodologies that can be accepted, and the most appropriate method to use should be determined by reference to the type of transaction being considered. Documentation must be retained to support the level of charge made in the company’s accounts and tax return in case of HMRC.

The UK has a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to. Where it has been determined that certain related party transactions have not been reflected on an arms-length basis in the accounts, it is necessary to make an adjustment in the tax return where the result would have been otherwise an understated level of chargeable profits. However, it is important to note that transfer pricing adjustments in the tax return can only be positive, and it is impossible to include negative adjustments outside of the financial statements.

How do we assist UK Subsidiaries?

Whether you need a fully outsourced UK finance department, compliance or audit, find out more about the services we offer to UK Subsidiaries of International Companies

 

There is an exemption from transfer pricing rules for companies that fall within the definition of “Small” or “Medium”. The definitions of these are as follows:

  • Small: less than 50 employees, and either turnover or gross assets not exceeding €10 million
  • Medium: less than 250 employees and either turnover not exceeding €50 million or gross assets of less than €43 million.

However, it is important to be aware that HMRC has the power to direct a medium-sized company to apply transfer pricing in certain cases. Additionally, small and medium-sized enterprises can be subject to similar rules to transfer pricing where they transact with related parties from low tax jurisdictions.

Finally, it should be noted that, even in the case of small and medium-sized companies, HMRC can deny a corporation tax deduction for a charge where they believe that the main motive for incurring the charge was to reduce tax and it has not been incurred wholly and exclusively for the purpose of the company’s trade.

In summary, given the wide-ranging nature of transfer pricing rules, we recommend that this area be considered early when commencing activities in the UK. A detailed review must be carried out so that the most appropriate level of charges are applied, and the company remains compliant with the rules but also pays the correct level of corporation tax overall.

If you would like to discuss the implications of transfer pricing for UK subsidiaries of overseas groups or you might have or any accounting assistance required. info@kirkrice.co.uk or call (0)208 789 8588.

Please note: our articles are for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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