HM Revenue & Customs (HMRC) recently concluded a consultation on transfer pricing in July 2025, and several updates have since been announced.

The scope of the consultation involved the Government seeking views on possible amendments to the SME exemption.

These proposals include the removal of the exemption for medium-sized enterprises and possible changes to the definition of small enterprises.

The Government also sought views on the potential introduction of a new reporting requirement — the International Controlled Transactions Schedule (ICTS) — including its scope and content.

Draft legislation

A key outcome of HMRC’s consultation is the proposed exemption of UK-to-UK transactions from transfer pricing rules, provided that no tax advantage arises.

HMRC acknowledges that applying transfer pricing to purely domestic transactions can be burdensome, while often presenting limited tax risk.

These rules were originally introduced to comply with the UK’s obligations as a member of the EU, which are no longer relevant post-Brexit.

Further technical changes to the transfer pricing legislation include an amendment to the ‘participation condition’, which determines whether parties are sufficiently connected for the rules to apply. Additional clarifications have been introduced to confirm that:

• Financial transactions should be priced in accordance with the OECD Transfer Pricing Guidelines; and
• Intangibles should be priced on an arm’s length basis, particularly where they are the subject of cross-border transactions.

If you would like further details on these changes, please contact a member of the tax team.

Permanent establishments

HMRC has also proposed changes to the UK’s definition of a permanent establishment (PE) by aligning it with Article 5 of the 2017 OECD Model Tax Convention.

In practical terms, this is expected to have minimal immediate impact, as where a double tax treaty is in place, the treaty’s definition of a PE will continue to take precedence.

However, as the UK renegotiates its tax treaties, the updated OECD definition may become more widely adopted.

Separately, HMRC has also introduced changes to the Investment Manager Exemption. This exemption is intended to prevent overseas investors from being inadvertently brought within the UK tax net simply due to investment-related activities carried out in the UK.

Medium-sized enterprise exemption and ICTS

In a further consultation, HMRC has addressed two additional areas:

• Removal of the medium-sized enterprise exemption – This change would bring a significant number of groups into the scope of the transfer pricing rules for the first time.
• Introduction of the International Controlled Transactions Schedule (ICTS) – This new form would be required to be submitted annually alongside the UK corporation tax return.

HMRC’s rationale is that the UK is currently an outlier among peer jurisdictions in offering a medium-sized enterprise exemption. They believe that most groups of this size are already applying transfer pricing principles to satisfy overseas tax authority requirements.

Regarding the ICTS, HMRC has stated that the collection of standardised and objective data will help support a more risk-based and targeted approach to transfer pricing enquiries. These new rules are likely to catch multiple businesses, therefore if you feel that you are likely to now be caught under these rules, and would like any additional advice, please reach out to our corporate tax team who are happy to assist with any queries.