On April 28 2025, the UK government released a Tax Administration and Simplification Update, which included draft legislation, consultations, and key announcements on transfer pricing reforms.
Aimed at aligning the UK’s tax framework with international standards and reducing administrative burdens. The proposed changes include targeted adjustments to existing rules and broader changes such as a new exemption for UK-to-UK transactions, the potential removal of the medium-sized business exemption and the introduction of an International Controlled Transaction Schedule (ICTS)
The definition of Permanent Establishment
Updates are being made to the definition of Permanent Establishment, the rules for attributing profits to a Permanent Establishment, the participation exemption, the valuation of intangibles and rules on guarantees. These changes are aimed at aligning with modern international standards and the government hopes they will help simplify administration.
Exemption from Transfer Pricing regulations for UK: UK transactions
A key change that will narrow the scope of transfer pricing for many UK businesses is the introduction of a general exemption for transactions between UK companies. This exemption is subject to the usual exclusions. For example, where companies are not taxed at the same rate. Excluded cases would include companies with ring-fenced profits, those in the Tonnage Tax regime, and potentially others.
However, it remains unclear whether the exemption will apply to companies subject to different rates due to the marginal or small profits tax rates. Additionally, small companies could still receive a transfer pricing notice at HMRC’s discretion.
Removal of exemption for medium sized entities
The government is currently seeking views on a potential change that would significantly widen the scope of transfer pricing by removing the exemption for medium-sized enterprises. These businesses would become fully subject to transfer pricing rules going forward. Currently, they are only subject to transfer pricing for transactions with related parties in a limited number of territories, and specifically, those without a double tax agreement containing an appropriate non-discrimination clause.
International Controlled Transaction Schedule (“ICTS”) disclosure
The government has indicated that it is ‘considering requiring’ the submission of an International Controlled Transaction Schedule (ICTS) to disclose certain cross-border related party transactions to HMRC. The proposal is intended to align with similar rules in other major economies, while minimising administrative burdens on businesses. The scope would include transactions between UK-resident companies and their non-UK permanent establishments (PEs), as well as between UK PEs of non-UK companies and their related entities. The collected data would also support HMRC’s use of automated systems for risk identification and review.
The ICTS should be completed by the following entities subject to transfer pricing with material cross-border transactions: UK PE’s of non-resident entities, UK entities with foreign PE’s, and UK entities subject to transfer pricing. UK PE’s of non-resident entities would disclose transactions between the non-resident entity and associated entities where the transactions are attributable to the UK PE. UK-resident companies would disclose dealings with their overseas PE’s and transactions with overseas associated entities. UK to UK related party transactions would be excluded, as would dividends exempt from UK tax and transactions covered by an Advance Pricing Agreement. Where the total value of transactions with “qualifying territories” is under £1m (adding the gross income to the gross expenses) and there are no transactions with non-qualifying territories then the businesses will also be exempt from the ICTS. The qualifying territory is defined in the same way as the definition in the SME exemption, i.e. a territory with a double tax agreement containing an appropriate non-discrimination agreement.
The ICTS template will consist of one table for related party transactions and a second table for related party loan relationships. Transactions may be aggregated, except where they involve different counterparties, currencies, transaction types, or other distinguishing features.
Given the relatively modest areas on which the Government has requested feedback it is likely that the ICTS will be introduced, possibly as soon as April 2026.
We’d love to hear from you. To book an appointment or to find out more about our services:
