Formal transfer pricing documentation is needed to ensure compliance with UK tax legislation. However, an exemption to this requirement is available to Small and Medium enterprises. Read on to find out whether your business can benefit from this exemption.

Where transactions between associated companies are not considered to be on an arm’s length basis, potentially creating a UK tax advantage for one of the parties, the taxable profits and losses of the party should be calculated as if the transaction had been made on an arm’s length basis. An arm’s length transaction is one where both parties act independently without one party influencing the other. There is also a requirement to maintain up to date transfer pricing documentation. These rules however do not apply to small or medium sized enterprises (SME’s).

What is an SME?

For an entity to be considered a small enterprise, it should have a staff headcount of below 50 and a turnover or balance sheet total not exceeding €10m. A medium-sized enterprise has a staff headcount of no more than 250 and either a turnover below €50m or a balance-sheet total not exceeding €43m. Both Small and Medium sized entities can benefit from a Transfer Pricing exemption.

Overseas territory

This exemption does not apply to transactions where one enterprise is in a territory which is not a qualifying territory. A non-qualifying territory is a territory which the UK does not have a double taxation agreement which has a non-discrimination provision. All SME’s must apply the arm’s length principle to transactions with a non-qualifying territory.

HMRC includes a list of those territories with the appropriate double taxation article: HMRC - Double taxation agreements.

Notice from HMRC

HMRC may provide a transfer pricing notice to medium sized entities which requires the entity to account for transfer pricing in the calculation of their taxable profits as outlined by HMRC. The company can appeal the notice to HMRC.

Where notice is given, the exemption is withdrawn. The entity has 90 days from the date that the notice is given to amend their tax computation to comply with the notice. If the company appeals the notice, the 90 days is counted from the date that the appeal against the notice is determined.

Election to not apply

A business may wish to apply transfer pricing rules despite the exemption applying to them. A business can therefore elect that the exemption will not apply. The election is irrevocable and will cover all transactions in the period that the election has been made. This election applies to only medium sized entities.

Documentation

Although there is no formal requirement to prepare and maintain records, it is advised that records are kept which support that transactions are being carried out on an arm's length basis.

Penalties

Medium sized entities have 90 days from the day that the notice is given to prepare adequate documentation and amend the return. Penalties can only be applied for an incorrect return in respect of transfer pricing only after the 90 days have passed. Other jurisdictions do not have a similar exemption, although smaller enterprises are typically subject to less onerous scrutiny than larger multinational groups.

Get in touch

Companies should be aware of whether they fall within the SME transfer pricing exemption or not and should comply with the requirements. We can help you to determine whether the exemption applies and whether any action needs to be taken by you as the company. Complete the form below and one of our tax experts will be in touch.