Transfer pricing – Legislation Day 2022

On Wednesday 20 July 2022, the government released draft legislation for the Finance Bill for 2022 and the results of consultations. From a transfer pricing (TP) perspective, this legislation is based around the sharpening of documentation preparation, penalty regimes and audit trails.

Below we summarise the areas that may be of interest and link the relevant announcement.

After more than 6 years passing since the OECD action plan response set out a new approach to transfer pricing documentation, we now have confirmation that the UK documentation changes (Local and Master file) will take effect for CbCr groups for accounting periods commencing on or after 1 April 2023. This has been driven in part by HMRC’s experiences in recent transfer pricing interventions that businesses require certainty on HMRC’s documentation expectations and assistance to help recognise and resolve transfer pricing risks.

A ‘summary audit trail’ (SAT) will also be required, meaning that businesses must complete a questionnaire specifying the actions taken when preparing the Local file documentation. This is a departure from the standard OECD format and again is intended to assist taxpayers; ensuring that when preparing the documentation an appropriate level of care and rigor is given to the facts supporting the transfer pricing policies.

Finally, there has been a tightening of Schedule 24 of the Finance Act 2007 to adjust the penalty scheme. Where there has been a failure to produce and maintain TP documentation, there will now be a presumed careless penalty. The government suggests these penalties can only be displaced if the documents are produced when requested and the underlying TP information had been prepared in advance of filing the Corporation Tax return. This is clear encouragement for prioritising the production of the master and local files before filing the UK tax return(s) when the new rules come into force.

The full new draft legislation can be found through the link below:

New transfer pricing documentation requirements for UK businesses - GOV.UK (www.gov.uk)

Key contacts