Transfer Pricing Arm's-Length Calculator

Transfer pricing refers to the prices charged between related companies (parent-subsidiary, sister companies, or companies under common control) for goods, services, IP licences, or financing. UK law (TIOPA 2010 Part 4) requires these to reflect arm's-length prices — what unrelated parties would charge.

Transfer pricing rules apply to 'medium and large' UK companies with related-party cross-border transactions. Small companies are exempt. 'Medium' = at least 250 employees or €50m turnover and €43m balance sheet. The rules can also apply to domestic transactions for some purposes.

The arm's-length principle requires related-party transactions to be priced as if they were between independent companies negotiating at arm's length. OECD Guidelines provide accepted transfer pricing methods: comparable uncontrolled price (CUP), cost plus, resale minus, TNMM, and profit split.

Large companies must maintain contemporaneous transfer pricing documentation showing how prices were determined. This includes functional analysis, benchmarking studies, and comparables. HMRC can request this during an enquiry and penalties apply for inadequate documentation.

Yes — HMRC can open an enquiry into a tax return within 12 months of filing (or longer for offshore arrangements). If prices are found to be non-arm's-length, HMRC will make a 'primary adjustment' increasing UK profits, and may seek a 'compensating adjustment' in the counterparty jurisdiction.

An APA is a formal agreement between a taxpayer and HMRC (and potentially a foreign tax authority) agreeing the transfer pricing methodology in advance. APAs provide certainty but require significant time and cost to negotiate. They typically last 3-5 years.

For inaccuracies in tax returns: up to 30% of potential lost revenue for careless errors, up to 70% for deliberate errors, and up to 100% for deliberate and concealed. Enhanced penalties apply for offshore matters.

Since 2004, UK-to-UK transfer pricing can be subject to adjustment if one party is a small company (exempt from transfer pricing) and the other is large. From April 2024, domestic transfer pricing rules were simplified. Predominantly, UK-to-UK intragroup pricing is managed via the group relief system.