Pricing methods

Accepted methods

What transfer pricing methods are acceptable? What are the pros and cons of each method?

Her Majesty’s Revenue & Customs (HMRC) accepts all OECD transfer pricing methods. Although no absolute hierarchy exists within the OECD Transfer Pricing Guidelines (the Guidelines), HMRC considers that, in all cases, the comparable uncontrolled price (CUP) method is generally preferred and expects sufficient efforts to be made to identify a suitable CUP. If both traditional transaction methods and transactional profit methods can be applied with equal reliability, the Guidelines express a preference for traditional transaction methods, which are considered to be more direct. However, it may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on the price.

If a reliable CUP cannot be found, then, in line with the Guidelines, HMRC places emphasis on choosing the most appropriate method for the particular type of transaction rather than establishing a rigid hierarchy of methods. For tangible property transactions, such as retail and manufacturing, the resale minus method is considered by the OECD to be the most useful. However, the most common difficulty with this method is the availability of reliable financial information on the comparable entities.

For semi-finished goods (for instance, the transfer of goods from a supplier to a related party) and services transactions, the cost-plus method (CPM) is most useful. The CPM is easy to implement. However, it may be difficult to find comparables that perform comparable functions, bear comparable risks, own the same assets and operate in comparable market conditions.

The transactional profit split method (PSM) and transaction net margin method are considered to be useful for complex trading relationships involving highly integrated operations where it would otherwise be difficult to split the relationship into separate transactions to which the analysis can be applied.

Following the OECD's project on base erosion and profit shifting (BEPS), we are noticing an increasing acceptance of and reliance on the transactional profit methods. A PSM could be difficult to apply and is very dependent on inputs that may change year on year, giving a need to update pricing more regularly than the traditional transactional methods.


Are cost-sharing arrangements permitted? Describe the acceptable cost-sharing pricing methods.

HMRC follows the Guidelines in relation to cost-sharing arrangements or cost contribution arrangements (CCAs). Following BEPS, the CCA rules were updated and take into account the value of each participant’s contribution.

CCAs arise where:

  • participants have the expectation of mutual benefit from an activity and agree to share the contributions to that activity in proportion to the benefits they each expect to obtain; and
  • each participant has an ownership interest in the property acquired and can exercise that interest without payment of further consideration.


HMRC recognises that although CCAs are uncommon in most sectors, when they do arise, they can be genuine and based on good commercial reasons. Nevertheless, HMRC will consider CCAs carefully to ensure that the methods employed do not differ from those that would have been agreed between independent parties and that any required adjustments are made. However, HMRC notes that the Guidelines caution against making minor adjustments and considers that it will only be appropriate to disregard the terms of a CCA in exceptional circumstances.

Best method

What are the rules for selecting a transfer pricing method?

There is no strict hierarchy of methods; rather, HMRC follows the Guidelines’ ‘natural hierarchy’. Generally, the CUP method is preferred, and, in practice, HMRC expects sufficient efforts to be made to identify a suitable CUP. If both traditional transaction methods and transactional profit methods can be applied with equal reliability, the preference is for traditional transaction methods.

If a reliable CUP cannot be found, then, in line with the Guidelines, HMRC places emphasis on choosing the most appropriate method for the particular type of transaction.

For more complex transactions, HMRC is open to exploring other methods if it is considered that they provide a stronger case for application of the arm’s-length principle.

Taxpayer-initiated adjustments

Can a taxpayer make transfer pricing adjustments?

Transfer pricing adjustments in the United Kingdom should be self-assessed on the income tax or corporation tax return of the person who obtains the potential tax advantage. For companies, at present, those tax returns must generally be filed a year after the end of the accounting period in which the relevant transaction took place.

Income tax returns must currently be filed at the end of January in the year following the financial year to which they relate. However, HMRC is modernising its systems and introducing a new digital ‘tax account’ programme, and from April 2019, businesses are mandated to use the ‘Making Tax Digital for Business’ platform for their VAT obligations. The Making Tax Digital service for income tax is part of a live pilot for test and development.

Transfer pricing adjustments can only be made where there is a potential UK tax advantage, so adjustments that reduce profits or increase losses are not permitted. However, where a potentially disadvantaged person is also subject to UK corporation tax, it can usually make a compensating adjustment to its taxable profits. It can do so by making a claim to HMRC within two years of the potentially advantaged person filing their tax return showing the adjustment.

Generally, transfer pricing adjustments may not be made through a company’s accounts. The government consulted on whether to introduce a secondary adjustments rule into the UK transfer pricing legislation in May 2016. Although the consultation closed in August 2016, the formal results have not yet been published. We do not expect this measure to be introduced in the near to medium future.

Safe harbours

Are special ‘safe harbour’ methods available for certain types of related-party transactions? What are these methods and what types of transactions do they apply to?

Most small and medium-sized enterprises (SMEs) are exempt from the requirement to apply transfer pricing in the United Kingdom. The definition of an SME corresponds with the European Union’s definition: broadly, a small enterprise has fewer than 50 employees and either turnover or gross assets of less than €10 million, and a medium-sized enterprise has fewer than 250 employees and either a turnover of less than €50 million or gross assets of less than €43 million.

SMEs can, however, be subject to transfer pricing in certain circumstances. The exemption does not apply if the SME transacts with an entity in a ‘non-qualifying territory’ (ie, if that territory’s double tax agreement with the United Kingdom does not contain a non-discrimination article). HMRC may also notify a medium-sized enterprise that it must apply transfer pricing for a particular period.

An SME may also elect for the exemption not to apply, which it may wish to do to claim a corresponding adjustment in a jurisdiction that has a higher tax rate.

Finally, where an SME is party to a transaction that is relevant to a patent box claim, HMRC may issue a notice requiring that person to compute his or her profits in accordance with transfer pricing.

Law stated date

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6 July 2020.