Transfer Pricing: Mandatory requirements

Timing: The new rules apply for corporation tax accounting periods beginning on or after 1 April 2023, and for income tax purposes from the fiscal year 2024/25. Those entities which fall within the scope of the transfer pricing requirements must prepare a Master File and Local File which contain the information described in the 2022 OECD transfer pricing Guidelines.

Providing records to HMRC: The Master and Local Files do not need to be filed with the entities tax return but if requested, must be provided to HMRC within 30 days. Information notices requesting the specified transfer pricing records cannot be appealed.

Master File: It’s now a legal requirement to maintain both a master and local file. The Master File contains high-level information on the group’s global business operations and its transfer pricing policies.

Preparation of UK Local File: The Local File sets out the economic characteristics of the related party transactions of the UK entity, the amounts involved, and the transfer pricing analysis demonstrating that the pricing applied to each class of transactions is arm’s length.

Materiality: Only material categories of controlled transactions need to be included in the Local File. To assess the materiality of a category of controlled transactions for a UK entity, all the transactions within that category must be aggregated. The appropriate value to consider is the aggregate arm’s length price of the transactions in the category and materiality should be viewed from the perspective of the individual UK entity preparing the Local File. HMRC have listed specific categories of transactions they will always consider material regardless of value due to their nature and complexity. 

Frequency of updates: HMRC expects the specified transfer pricing records to be reviewed annually, at a minimum, and updated, as necessary. Whether or not there are updates, there will need to be a specific set of finalised records for each period. 

Penalties for non-compliance and SOA responsibility: A penalty of up to £3,000 may be charged for each failure to keep or to preserve adequate records in respect of a return. There is also a penalty of up to £300 and a further £60 per day where the 30-day time limit is breached. In addition, a relevant person's failure to keep and preserve a Master File and/or Local File may impact subsequent penalty considerations if HMRC later finds an inaccuracy in a return that relates to transfer pricing. The guidance states that maintaining the specified transfer pricing records is within the Senior Accounting Officer’s responsibilities and failure to keep the records may indicate adequate accounting processes.