Corporation Tax Transfer Pricing
Transfer pricing relates to the pricing arrangements between connected businesses for the transfer of both tangible and intangible property. This can cover a wide range of situations such as management charges, sales of goods and intercompany financing.
The 2004 Budget introduced a number of significant changes to the UK transfer pricing legislation all of which take effect from 1 April 2004. The main changes are as follows:
- Extend the scope of the legislation to include transactions between UK companies.
- Exempt small and medium sized businesses from the transfer pricing requirement; however there are exceptions which generally cover transactions with businesses established in a tax haven.
- In exceptional circumstances the IR can impose transfer pricing adjustments on a medium sized business if they consider the scheme is being exploited.
- Include thin capitalization rules within the legislation; this concerns intercompany funding.
So what does this mean for UK businesses?
From 1 April 2004, as a general rule, only large companies or entities subject to UK corporation tax will need to make an adjustment in their tax returns for any transactions with connected business either in the UK or overseas not carried out on an arm’s length basis. As a result such businesses will need to carry out some form of study to ensure that either the price being charged is appropriate or how much of an adjustment is needed. The need to have full documentation in place to support the transfer price has been relaxed until March 2006.
For these purposes a large company is one with:
- More than 250 employees; and either
- Annual turnover more than €50m; or
- Balance sheet total over €43m
If the entity is a member of a group then the limits apply to the worldwide group.
What should you do next?
As this new legislation has exempted a vast number of businesses from the requirements of transfer pricing legislation, the Revenue is more likely to scrutinize the returns of large companies to ensure that the legislation is being followed. As a result all entities need to establish if they can rely on the exemptions available; this is an area where we can be of assistance. If the business is not exempted then at this stage we would recommend that all companies carry out some form of comparative study before filing the return to ensure that any adjustments are made on the return. This is an area where we have a vast amount of expertise as all our senior tax managers have worked within a ‘Big 4’ environment and have dealt with this type of work.
For further information please contact either Denise Lavender or Tracey Harrold on 0118 9576464 |
