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UK Transfer Pricing rules apply, broadly speaking, where a UK business (which is subject to Income Tax or Corporation Tax) has a transaction with another business with which it is associated. Businesses are associated when one controls the other or both are under common control.

The rules work by adjusting the amount of profits of a business that is the subject of UK direct Tax on the basis of the 鈥渁rm鈥檚 length鈥� results of the relevant transaction. (Note that many transfer pricing methodologies do not arrive at a particular price for the goods or services supplied but rather determine an appropriate arm鈥檚 length profit margin for the relevant business). 鈥淎rm鈥檚 length鈥� results are those that would have been expected if the businesses were independent of each other. The rules are applied on the basis of a 鈥渙ne way street鈥�: that is to say, they are only applied in respect of a result where the outcome would be to increase the amount of the business鈥� profits or reduce the business losses arising for UK direct Tax purposes.

Transfer pricing rules apply even where there may be no transaction recorded in the accounts of the businesses concerned.

The international consensus of the 鈥榓rm鈥檚 length鈥� principle is achieved by its inclusion at Article 9 of the Organisation for Economic Co-operation and Development鈥檚 Model Tax Convention (the 鈥極ECD Model Treaty鈥�). The OECD is a discussion forum for member countries to compare policy approaches to a range of issues including taxation. It has developed a number of international standards including the Model Tax Treaty.

There is no set way for the 鈥榓rm鈥檚 length鈥� provision to be calculated, as circumstances will vary widely. There are also no set records that an entity need keep to demonstrate the transfer pricing adjustment to taxable profits. However there will be classes of records including;

• identification of transactions to which the transfer pricing rules apply - those with connected parties;
• evidence demonstrating the provision of those transactions is at arm鈥檚 length, or the calculation of an arm鈥檚 length provision;
• Records of adjustments to taxable profits in the cases where required.

One way for a Company to meet the requirements is for it to conduct all of its transactions at 鈥渁rm鈥檚 length鈥� provision, whether its customers are associated or not. Profits recorded in the accounts would, therefore, already reflect arm鈥檚 length transactions and no Transfer Pricing Adjustments would be necessary.

There are no separate 鈥楾ransfer Price Adjustment鈥� pages on the Corporation Tax return (CT600). Entities have to make the computational adjustments to taxable profits if transactions recorded in their accounts are not at arm鈥檚 length.