| Principle | arm's length under TIOPA 2010 Part 4 |
| HMRC adjustment | upwards only: more profit or less loss |
| SME exemption | up to 250 staff and turnover under €50 million or balance sheet under €43 million, measured across the whole group |
| Counterparty country | exemption only for transactions with countries on HMRC's list of treaties with a suitable non-discrimination article |
| Master file and local file | groups with worldwide turnover of €750 million or more |
| New return (ICTS) | expected for periods from 1 January 2027 |
What it is about: one price, two tax authorities
Your company at home supplies machines to the UK subsidiary, recharges it for accounting and IT, licenses it the brand and funds the start with a loan. Each of these shifts profit: if the price is high, more stays at home; if low, more in the UK. That is exactly why both states want the price to look as if two independent businesses had negotiated it.
The UK sets this out in the Taxation (International and Other Provisions) Act 2010, Part 4. The yardstick is the internationally usual arm's length principle, and the rules are read in line with the current OECD model convention, its commentary and the OECD transfer pricing guidelines. If you know the guidelines at home, you will find your way in London too.
One quirk to know: the UK adjustment works upwards only. HMRC can raise a UK company's profit that is too low, but UK law never reduces a profit or increases a loss. If the subsidiary paid too much, it is not HMRC that helps you but the treaty; more below.
Does it apply to you? The UK SME exemption
The good news for mid-sized businesses: section 166 TIOPA exempts most transactions of small and medium-sized enterprises from the UK transfer pricing rules. HMRC uses the definition in the 2003 EU recommendation. Medium-sized means up to 250 staff and either turnover under €50 million or balance sheet total under €43 million; small means up to 50 staff and turnover or balance sheet under €10 million.
The catch is in the small print: if the UK company belongs to a group, the limits apply to the whole group, not the subsidiary alone. A UK company with three staff whose parent abroad employs 400 people is no SME for this rule.
Second exception: the exemption does not cover transactions with related parties in countries with which the UK has no treaty containing a suitable non-discrimination article. HMRC keeps a list of qualifying treaties; check that your country, and every sister company's country, is on it. For transactions with a sister in a country that is not, the full rules apply.
And for medium-sized groups HMRC can issue a notice requiring arm's length pricing for a particular transaction after all. Conversely, you can irrevocably elect for a period to apply the rules voluntarily. That can make sense if your home country requires arm's length pricing anyway and you want both sides treated alike.
In 2025 the UK government had put restricting the exemption for small and medium-sized enterprises up for discussion. After consultation it decided that SMEs keep the existing exemption. As of November 2026 it applies unchanged.
What your home country requires
The UK exemption ends at the UK border. Most countries adjust income from dealings with related parties abroad to an arm's length price under their own law, and many require documentation for exactly those dealings. So the parent needs its transfer prices justified even if the UK subsidiary itself is exempt.
What documentation your company must keep at home we check case by case. In practice: a transfer price you justify cleanly once serves both sides.
Documentation: master file, local file and the new return
Large groups with worldwide turnover of €750 million or more, so all groups within country-by-country reporting, must keep a master file and a local file in OECD format for their UK companies and permanent establishments and produce them on request. A summary audit trail comes on top, a short questionnaire on how the local file was prepared.
New is the International Controlled Transactions Schedule (ICTS): an annual standardised report of cross-border transactions between related parties, which HMRC wants to use for automated risk assessment. The legal basis came with the Finance Act 2026, and the technical consultation on the draft regulations ran until 31 July 2026. The start is expected for periods from 1 January 2027, for groups within scope, not for every small company.
The reform enacted on 18 March 2026 changed more. Transactions between two UK companies are exempt from the transfer pricing rules under conditions where no UK tax is lost. For transfers and licences of intangibles from 1 January 2026 a single valuation standard applies: arm's length between related parties across the border, otherwise market value. If you license or transfer a brand or software from home to the UK subsidiary, keep that in view.
When two states tax the same profit
If HMRC raises the subsidiary's profit without your tax office at home reducing the parent's, the same pound is taxed twice. The associated enterprises article of the UK's treaties allows both states to tax profits that ended up with the related company through non-arm's length conditions. The mutual agreement procedure brings the balance.
Treaties set a time limit for presenting the case, often three years from the first notification of the action leading to taxation not in line with the treaty, and many provide arbitration if the authorities cannot agree. Check your treaty's terms; the principles are in the UK's tax treaties.
If you run a branch instead of a subsidiary, a related logic applies: the permanent establishment is attributed the profit it would have made as an independent enterprise. How that works is in branch or subsidiary. Which tax that profit triggers in the UK is explained in UK corporation tax.
How to set up intra-group prices in practice
For a mid-sized group with a new UK company, a lean framework usually suffices, if it is in place from the start.
- 1
List the transactions
What flows: goods, services, secondments, licences, loans, guarantees? Each type gets its own pricing logic.
- 2
Write the contracts
One intra-group contract per type of service, signed before anything is invoiced. It fixes price, method and payment terms.
- 3
Choose the method
For sales subsidiaries a margin on costs or sales is common, for routine services a mark-up on costs. Which method fits depends on the subsidiary's functions and risks.
- 4
Check size
Each year, confirm whether the group still falls within the SME exemption, and whether new sister companies in countries without a suitable treaty have been added.
- 5
Evidence for both sides
File the reasoning so it holds at home just as well as in response to an HMRC enquiry.
Frequently asked questions
My UK company has five staff. Am I automatically exempt?
Only if the whole group stays within the limits. The parent and associated companies count too. If the parent has 300 staff, the group is not an SME for this rule.
Does the exemption cover a loan from the parent to the subsidiary?
In principle yes; the exemption covers most transactions of an SME. For medium-sized groups HMRC can still require arm's length pricing by notice, and the interest restriction rules run independently.
Must a mid-sized business prepare a master file?
In the UK only if your group is within country-by-country reporting, so at least €750 million worldwide turnover. Documentation duties at home apply regardless.
What if HMRC does not accept the management fee?
HMRC increases the UK profit. To remove the double taxation, you apply for the mutual agreement procedure under the treaty, within its time limit. How an enquiry runs is in HMRC enquiries.
Sources: HMRC INTM412070: Transfer pricing, SME exemption; HMRC INTM412080: SME definition; HMRC INTM412090: Treaties with an appropriate non-discrimination article; HMRC INTM414020: Reform of transfer pricing; GOV.UK: Transfer pricing, scope and documentation (consultation outcome); GOV.UK: International Controlled Transactions Schedule; GOV.UK: Transfer pricing documentation requirements for UK businesses; GOV.UK: Double taxation, objecting if your company is not being taxed correctly (MAP)
