Does transfer pricing only affect large multinationals?

No. While the SME exemption takes most small and medium-sized businesses out of the rules, HM Revenue and Customs can require a medium-sized enterprise to apply them by notice, and the exemption does not cover dealings with a party in a non-treaty territory. Any business with related companies abroad should check its position.

What is the arm's-length principle in plain terms?

It means pricing a transaction between connected companies at the level that two independent companies would have agreed. If the actual price differs, the United Kingdom party's taxable profit is recalculated on independent terms.

Transfer Pricing Explained for UK Businesses

Q: Do we need a master file and a local file?

Only if your United Kingdom entity is in a group within Country-by-Country Reporting scope, meaning consolidated group revenue of €750m or more, for accounting periods beginning on or after 1 April 2023. Smaller groups still have to support their pricing but are not caught by that specific rule.

Written and reviewed by the International Tax Accountants editorial team. Last reviewed 29 July 2026.

Transfer pricing governs how a business prices the transactions it has with related companies in the same group, such as goods, services, loans and the use of intellectual property. When one side of the transaction sits in the United Kingdom and the other sits abroad, the price affects where profit lands and therefore how much United Kingdom tax is due. The rules exist so that a group cannot shift profit out of the United Kingdom simply by charging itself an artificial price.

The United Kingdom rules are set out in Part 4 of the Taxation (International and Other Provisions) Act 2010. They require related parties to price their dealings as if they were independent, and they give HM Revenue and Customs the power to adjust taxable profit where the actual price does not meet that standard.

Transfer pricing turns on the arm's-length principle, the exemption for smaller businesses and its limits, the records a group in scope has to keep, and the changes the government announced at the Autumn Budget 2025. A cross-border group usually has to weigh it against whether its activity abroad creates a permanent establishment, which brings a separate charge in the other country.

The Arm's-Length Principle

The arm's-length principle is the core of the rules. It asks a simple question: would two independent businesses, each acting in its own interest, have agreed the same terms as the connected parties actually agreed? If the answer is no, the profit of the United Kingdom party is recalculated on the terms that independent parties would have used.

The principle applies across the full range of intra-group dealings, including the sale of goods, management and support services, intra-group financing, and licences over brands and technology. It is set out at section 147 of the Act and it can only increase United Kingdom taxable profit, not reduce it.

The SME Exemption and Its Limits

Section 166 exempts most small and medium-sized enterprises from the rules. The size tests come from the Annex to Commission Recommendation 2003/361/EC, applied through section 172. A business is small if it has fewer than 50 staff and either turnover no more than €10m or a balance sheet total no more than €10m. It is medium if it has fewer than 250 staff and either turnover no more than €50m or a balance sheet total no more than €43m. The staff figure is a hard cap, while the financial test is met on turnover or balance sheet.

The exemption is narrower than it first appears. Under section 167 it does not apply to a transaction with a person in a territory that has no suitable tax treaty with the United Kingdom. Under section 168 HM Revenue and Customs may issue a transfer pricing notice requiring a medium-sized enterprise to apply the rules for a period. A medium-sized business is therefore not automatically outside the regime.

Documentation Requirements for UK Groups

The Transfer Pricing Records Regulations 2023 require larger groups to keep a master file and local file, one for the group and one for the United Kingdom entity.

The requirement applies to United Kingdom entities in groups that are within the scope of Country-by-Country Reporting, meaning consolidated group revenue of €750m or more, for accounting periods beginning on or after 1 April 2023. Groups below that threshold still have to be able to show that their pricing meets the arm's-length standard, but they are not caught by the specific master file and local file rule.

Changes Announced at Autumn Budget 2025

At the Autumn Budget 2025 the government decided not to remove the transfer pricing exemption for medium-sized enterprises, so medium-sized businesses keep that exemption subject to the carve-outs above. This was a policy decision rather than a change to the existing law.

The government also announced a new International Controlled Transactions Schedule, an annual structured report of cross-border related-party transactions. This was announced at the Autumn Budget 2025 and is not yet enacted law, and no commencement date has been confirmed. Businesses with material intra-group cross-border dealings should keep the proposal in view when they plan their reporting.