On 28 April 2025, the Government published draft legislation and a policy paper to take forward its plans to reform the UK鈥檚 transfer pricing (TP), permanent establishment (PE) and Diverted Profits Tax rules. We have outlined the main changes in a separate article聽in today鈥檚 edition. At the same time, HMRC have published a new policy on proposals to restrict the exemption from the UK TP regime for Small and Medium Enterprises (SMEs) to Small Enterprises only, and introduce new requirements for reporting international controlled transactions for which it is intended both large and medium-sized multinational enterprises would be in-scope. These measures are designed to protect the UK tax base from cross-border profit diversion and align the UK compliance requirements for TP more closely with international peers.
International Controlled Transactions Schedule
The introduction of a new requirement for businesses to complete and submit an International Controlled Transactions Schedule (ICTS) could represent a significant additional compliance obligation. The ICTS would be a schedule, in a prescribed format and filed annually along with existing tax return requirements, in which in-scope entities would summarise their reportable cross-border transactions. These would include dealings of a UK PE of a non-resident company and dealings of a UK resident company with its overseas PEs.
The ICTS is aimed at enabling automated data-led risk assessment to improve the targeting of HMRC enquiry activity, promoting upstream compliance and reducing the length of TP enquiries. The requirements would apply to companies of all sizes that are within the scope of the UK TP rules. Indeed, one of the drivers is to enable HMRC to be able to better assess risk for medium-sized enterprises coming within the expanded scope of the TP rules.
HMRC acknowledge concerns that were raised when a similar proposal, in the guise of the 鈥業nternational Dealings Schedule鈥�, was originally consulted on in 2021, and seek feedback on how effectively they have addressed these concerns in the revised proposals. The assumption is that the information required to be included in the ICTS would be readily available as it corresponds to objective and/or numerical information that should generally be found in a Local File anyway. HMRC are seeking to obtain this information in a different format from the Local File that will make it easier to automate risk assessment at scale.
There may be scope to exclude information contained in the ICTS from the Local File requirement, though how beneficial this would be in practice is uncertain. HMRC also propose that if the plans are adopted, they would develop an IT solution to enable the required information to be captured and submitted efficiently. For now, the suggested format is included as an Excel file forming to the consultation.
In the spirit of targeting areas of greatest risk, there are proposals for transaction aggregation, according to defined rules, and exclusions. The criteria for aggregation are strict which means it is unlikely to simplify the reporting process significantly. Where there are no transactions with non-qualifying territories (as per the SME exemption) and the aggregated total value of transactions with qualifying territories is less than 拢1 million, the business will not be required to complete the ICTS. Where the ICTS is required, a de minimis threshold of 拢100,000 for individual aggregated聽transaction categories is suggested; a higher threshold (perhaps 拢1 million) may be permitted for large businesses required to prepare a mandatory Master File, UK Local File(s) and Country by Country Reports. Loan relationships will be governed by dual thresholds covering both the quantum of borrowing and profit/loss impact, again with higher thresholds being contemplated for large businesses subject to the mandatory TP documentation requirements.
The ICTS would represent a significant change for businesses to comply with and is also likely to have important implications for HMRC enquiry activity if implemented.
SME exemption
The Government is proposing to make changes to the exemption for SMEs, most notably to limit it to small enterprises only. The existing exemption was introduced in 2004 to mitigate the compliance burden on smaller UK entities that would result from the extension of the UK TP regime to domestic transactions. As we discuss in our separate article, many of these transactions are now to be exempted under the wider TP reform proposals. HMRC therefore consider that the SME exemption in its current form will no longer be justified in view of the wider scope of TP rules in other jurisdictions.
The SME exemption applies to businesses satisfying thresholds for the number of staff, annual turnover and the balance sheet total. These amounts are calculated based on a consolidated view and the rules around consolidation are relatively complex as they are based on criteria and definitions published by the European Commission (EC) that include linked and partner enterprises.
The thresholds for small enterprises are total staff numbering no more than 50 full time equivalent staff (including owner-managers and actively participating partners) and either balance sheet total or annual turnover of less than 鈧�10 million. HMRC鈥檚 intention is that these criteria should be retained (though alternative proposals are invited) but with the financial figures now changed to 拢10 million.
In addition, unlike the original EC SME definition, a business loses its SME status for UK TP purposes in the first year that it fails to meet the SME threshold conditions. HMRC propose to improve stability and predictability for small businesses by requiring a business to exceed the thresholds for two consecutive years before changing status.
Some simplifications are also proposed, mainly to remove the partner enterprises concept (based on 25 鈥� 50 percent participations) and focus the aggregation requirements on how participatory relationships are defined for the purposes of the UK TP legislation. The Government is also seeking views on whether the non-qualifying territory exception should be amended. The exception requires SMEs to apply the transfer pricing rules to all transactions with associated enterprises that are resident in a non-qualifying territory. The way that non-qualifying territories are defined is mainly focused on whether there is a double taxation treaty with the UK containing a non-discrimination article, rather than whether that jurisdiction represents a high risk of profit diversion, amply illustrated by the fact that Brazil is currently a non-qualifying territory.
The Government intends to preserve the ability for small enterprises to elect out of the exemption and the ability for HMRC to issue a notice directing small businesses to apply the TP rules to a relevant provision which impacts on the calculation of profits eligible for the Patent Box.
Conclusion
As for the main TP reform proposals, the consultation on the ICTS and SME Exemption are open for comment until 7 July 2025. Interested businesses are encouraged to consider and discuss how they may be affected. HMRC are also holding聽a number of consultation events on 22 May 2025 (in person at Parliament Square) and via livestream on 3 June and 18 June. You can register by completing this .
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