Earlier this year we advised that HMRC had published draft legislation covering some changes to key international tax topics, including transfer pricing and the definition of permanent establishment. Alongside the Budget were published two updates to these areas which will impact corporate groups of all sizes.

Transfer pricing

Transfer pricing rules govern how companies price transactions between themselves for tax purposes. There were a few important updates announced to how the UK’s transfer pricing rules will operate for corporate groups.

Abolishing UK-UK transfer pricing

The UK will abolish the requirement of transfer pricing rules on UK-UK transactions where there is no room for tax abuse. The change will take effect for chargeable periods beginning on or after 1 January 2026. This is a welcome simplification for many groups. The UK-UK rules will still apply in situations where one UK company benefits from a reduced rate of tax, such as if a company is claiming the Patent Box.

Retention of SME exemption

Following a consultation, HMRC has confirmed that it does not plan to remove or change in any way the Small and Medium Enterprise (SME) exemption from the transfer pricing rules. This will be good news for many medium sized groups who have limited overseas transactions and benefit from this simplification. It is disappointing that the size thresholds were not changed, since the same turnover/balance sheet amounts have been in place for twenty years now. The continued use of the European Commission definition of what is an SME is also challenging (as the thresholds are calculated in Euros and there are complex aggregation rules including for partner and linked enterprises), but HMRC did acknowledge this and hopefully this is a simplification that will be picked up on in future.

New transfer pricing reporting requirement – ICTS

A new transfer pricing reporting requirement will be brought in called the International Controlled Transactions Schedule (ICTS). This will be an additional report required to be filed digitally on an annual basis by UK groups that meet the size requirements, and it will disclose all cross-border intercompany transactions and the transfer pricing methodology used by the group. The new requirement is likely to apply from accounting periods beginning on or after 1 January 2027. There will be a further consultation on the detail in Spring 2026, which we will review and provide and update on at the time. We note that several other countries have introduced a similar reporting requirement in recent years, and the UK is adding to the trend of increasing transfer pricing compliance obligations.

Permanent Establishment (PE) update

A PE, also known as a branch, describes the situation where a company has a taxable presence in a county due to activities, such as renting an office or having an employee. The definition of PE in the UK legislation will be updated to match the OECD’s definition. This is a helpful simplification. The change in domestic legislation does not impact the definition of a PE used in existing double tax treaties that the UK has signed with many other countries. In many situations, therefore, the change in our legislation will have no impact on the existence (or otherwise) of a PE. The wording also makes clear that profits should be allocated to a PE in line with the Authorised OECD Approach (AOA). This is a welcome clarification.

OECD update

On a similar topic, just a few days before the UK Budget, the OECD published its updated Commentary on Article 5 of the Model Tax Treaty, which covers how the OECD Members interpret the definition of PE. This Commentary includes a much expanded section on the considerations for tax authorities as to whether a ‘home office’ can constitute a PE. This has become an increasingly common question post-pandemic and up until this update there has been very little guidance on the matter. Having additional guidance from the OECD is helpful for taxpayers.

Get in touch

If any of the above has raised questions in your mind about how your company is operating internationally then please don’t hesitate to get in touch with me at amanda.collinson@jcca.co.uk, your usual JC contact, or another member of our International Tax team, and we would be happy to discuss your situation and answer any questions.