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Freshfields Risk & Compliance

| 4 minutes read

Will UK transfer pricing documentation changes lead to fewer or shorter disputes?

The consultation recently published on strengthening the transfer pricing (TP) documentation requirements for UK businesses indicates a continued focus by the UK tax authority (HMRC) on revenue-raising from TP audits.

The consultation suggests the proposals would enable HMRC to conduct better risk assessment, direct TP enquiries more appropriately and reduce the time taken to establish the facts when enquiries are opened.

These are laudable objectives. But taxpayers might justifiably question the extent to which the increased compliance burden from the proposed enhanced documentation and reporting requirements is actually likely to lead to fewer or shorter TP disputes.

Experience shows that HMRC’s radar for difficult TP cases is already quite finely tuned and thorough testing of the facts will almost always be required for the enquiry to be worked properly and lead to successful resolution. That is more likely to be achieved efficiently if taxpayers also analyse the existing TP from a critical investigator’s perspective, so that key issues can more swiftly be identified and addressed.

Existing TP documentation requirements

The OECD’s BEPS recommendations included three tiers of standardised TP documentation: master file, local file and country by country reporting (CBCR). The UK has so far only implemented CBCR, which is limited to the largest multinational enterprises (MNEs). Alongside that, the UK has continued to rely upon the broad requirement for UK tax resident businesses to keep and retain sufficient records to demonstrate that their tax returns are complete and accurate.

That general requirement does still mean that companies should be maintaining appropriate documentation to support their TP (and HMRC’s published guidance gives a sense of what may be  considered appropriate). However, the UK rules do not currently prescribe what must be prepared or in what format.

What is proposed? 

It seems HMRC has heard on the grapevine how the information made available through the master file and local file requirements in other jurisdictions has enabled the tax authorities there to improve their risk assessment processes and has led to more effective, focused and timely enquiries. Unsurprisingly, HMRC now wants to get in on that action.

Master file and local file: The consultation leads with a proposal for MNEs in CBCR groups to be mandatorily required to provide HMRC with a copy of the master file upon request, and to keep (and similarly produce on request) a local file.

Evidence log: Going one large step further, it is also proposed that the local file be supported by an evidence log setting out key facts (as opposed to technical analysis or opinion), similar to the evidence log required for reports under the Profit Diversion Compliance Facility (PDCF).

International Dealings Schedule (IDS): In addition, there is a proposal (borrowed from certain other jurisdictions, like Australia) for all UK businesses to which transfer pricing legislation applies to prepare and file an annual IDS reporting certain details about cross border, intra-group transactions. This would be subject to a materiality threshold (to be determined) and could include information such as the nature of transactions, details of the counterparty, the compensation and the transfer pricing methodologies applied.


The assumption is that groups affected by the master file / local file proposal are likely already to be preparing master files and/or maintaining TP documentation that would align with local file requirements, so this shouldn’t impose a significant additional compliance burden.

That may well be right – but the evidence log proposal clearly goes much further and as currently described seems likely to involve a lot of extra work for those groups to which it would apply. The same is potentially true of the IDS proposal, depending on how it interacts with the local file requirement and the materiality threshold adopted.

Fewer and shorter TP disputes?


HMRC has for some time been using data analytics to enhance its risk assessment processes and the IDS is described as “potentially transformative” in this respect.

In theory, the additional data that would be generated by a local file / IDS in particular should translate into TP enquiries being focused on the intra-group arrangements that are perceived to be highest risk, in terms of shifting profits outside the UK tax net. However, HMRC’s resource constraints mean that this approach is largely already adopted.

In practice therefore taxpayers may not see any reduction in the number of TP enquiries opened. Indeed, it is perhaps inevitable that increased visibility over intra-group arrangements may prompt some TP enquiries to be opened that otherwise would not have been. We might also expect to see more taxpayers being “nudged” towards self-disclosure under the PDCF.


A key objective of the proposals seems to be a reduction in the time taken to establish the facts in “compliance interventions” and thus the time taken to resolve enquiries. One might imagine that HMRC have in mind requesting copies of the documents listed in the evidence log as the starting point for any enquiry.

But a detailed understanding of the facts and the overall business context is critical to any kind of TP or diverted profits enquiry. In our experience, HMRC rarely take at face value the picture they are initially presented with, including because a sufficiently thorough investigation will be required for any proposed resolution to be approved by HMRC’s internal stakeholders.

So while easy access to high level information may replace an initial round or two of correspondence with the taxpayer once an enquiry has been opened, it seems unlikely to result in any significant reduction in the time taken for the enquiry to be resolved – especially for the largest and most complex MNE groups.

What will make a difference? 

TP investigations (whether HMRC-led enquiries or conducted internally, under the PDCF) are more likely to be resolved efficiently if taxpayers and their advisers adopt an approach of critically analysing the existing TP, as HMRC will. Holding oneself to account in that way should mean the key issues can be identified, discussed and resolved more quickly.

For a more detailed article discussing this consultation see here.


europe, tax, tax disputes