UK Transfer Pricing Changes for Medium-Sized Businesses: What Business Owners Need to Know

Background: What Changed and Who Is Affected?

The UK’s transfer pricing rules ensure that transactions between related companies (e.g. a UK business and its foreign parent or subsidiary) are priced on “arm’s length” terms – as if the parties were independent and dealing in the open market. Historically, small and medium-sized enterprises (SMEs) have been exempt from these complex rules (with some exceptions).

An SME in UK terms is defined as a business with no more than 250 employees and either annual turnover under €50 million or total assets under €43 million. This definition is based on EU Commission criteria, which have been incorporated into UK law. In practice, that meant most mid-sized companies did not have to apply formal transfer pricing adjustments or prepare extensive documentation for HMRC.

The big change now is that the government plans to remove the transfer pricing exemption for medium-sized businesses. In other words, medium-sized enterprises will be brought into scope of the UK’s transfer pricing regime just like large businesses. Only small businesses would remain exempt. Under the proposed criteria, small enterprises are those with no more than 50 employees and either turnover or assets below ~€10 million (about £10 million, as the government plans to switch to a GBP threshold). Medium-sized firms (up to 250 staff and ~€50m revenue) that were previously exempt would now have to comply with transfer pricing rules and obligations similar to larger companies. This marks a significant expansion of scope: many mid-market companies will need to ensure their intercompany prices are arm’s length and be prepared to substantiate them.

Why Is This Change Happening Now?

Several domestic policy factors are driving this change (beyond the global OECD initiatives like BEPS, which have influenced many countries). The SME exemption was originally introduced in 2004 when the UK had to apply transfer pricing to domestic (UK-to-UK) transactions to comply with EU rules. To avoid over-burdening smaller businesses with having to analyze purely domestic trades, the UK carved SMEs out of the regime. Fast-forward to today: the UK has left the EU, and the government has proposed removing or largely repealing the requirement to apply transfer pricing to purely UK-to-UK transactions as part of a broader tax reform. With that domestic burden lifted, the original rationale for a blanket SME exemption is no longer as strong.

At the same time, HMRC is concerned about protecting the UK tax base from profit shifting, even by medium-sized groups. Currently, a sizeable portion of companies fall entirely outside transfer pricing enforcement due to the SME exemption. The government believes this creates a risk of cross-border profit diversion going undetected. By bringing medium-sized businesses into scope, HMRC can ensure more companies pay their fair share on UK profits instead of using related-party transactions to reduce taxable income.

There’s also a recognition that the UK’s policy has been an international outlier. Few other countries offer such a generous safe harbour for medium-sized firms. In most jurisdictions, if you engage in cross-border related-party deals, you’re subject to transfer pricing rules regardless of size (perhaps with lighter documentation for smaller entities, but not a full exemption). Aligning the UK’s rules with international norms is seen as important for fairness and consistency. In fact, many UK medium businesses might already be complying with transfer pricing rules elsewhere – for example, if a UK medium-sized subsidiary deals with a large foreign parent, the parent’s country likely requires those transactions to be arm’s length. As HMRC notes, most medium enterprises “will already be required to apply the transfer pricing rules of another territory” for their cross-border dealings.

In short, the change is driven by domestic policy goals: closing a gap in the tax system now that UK-to-UK transactions won’t need policing, and bolstering defenses against tax avoidance in the mid-market segment. This is not a mandate from the OECD or new international standards, but rather a UK policy decision to update an exemption that officials feel is no longer justified in its current broad form.

How Will HMRC Implement the New Rules?

As of mid-2025, these changes are proposals under consultation – they are not law yet. HM Revenue & Customs (HMRC) opened a formal consultation on 28 April 2025 to gather views on removing the medium-sized business exemption (and on a new reporting requirement, discussed below). The consultation runs for 10 weeks, closing on 7 July 2025. During this period, HMRC is seeking input from businesses, advisers, and trade groups on how to best design the rules “while limiting any administrative burden” on companies. They have been holding consultation events (including public meetings in May and June 2025) to explain the proposals and hear feedback.

After the consultation period, the government will analyze the responses and publish a summary of findings and decisions. If they decide to proceed with the reforms, the changes would be introduced via legislation in a future fiscal event (likely an upcoming Budget and Finance Bill). The government indicated that it aims to include related reforms in the Finance Bill 2025–26, with the earliest effective date being 1 January 2026 for implementation of changes. In practice, this means the new rules could apply for accounting periods beginning in 2026 or later, giving businesses some lead time to prepare. (Notably, HMRC has not committed firmly to the 2026 date for the SME/ICTS changes; they have said there is no fixed timeline and final timing will depend on the outcome of the consultation.)

HMRC’s implementation plan will likely involve several facets:

• Legislative change: The exemption in Section 166 of TIOPA 2010 (which currently spares SMEs) would be amended so that it only spares small enterprises, not mediums. Medium-sized businesses would thus be required to apply the arm’s length principle to all relevant related-party transactions in computing their UK taxable profits. Alongside this, HMRC is also tweaking the definitions to make them more UK-specific and user-friendly – for example, converting financial thresholds from euros to £10 million for the small business definition, and changing the rules so that a company has to exceed the size limits for two consecutive years before losing its small business status. That two-year buffer is intended to provide stability and prevent firms from bouncing in and out of exemption due to one-off growth spurts.

• Guidance and support: We can expect HMRC to update its guidance manuals and publish materials to help newly in-scope companies understand their obligations. Since this is a significant shift for many businesses, HMRC may provide examples or even workshops for medium businesses on how to comply. (During the consultation, HMRC explicitly invited suggestions on ways to implement the change without undue bureaucracy, so the final approach may include some simplifications or phased measures for first-time compliers.)

• Technology and reporting infrastructure: A key part of the proposal is introducing a new International Controlled Transactions Schedule (ICTS) – essentially a form that in-scope companies would file annually with their tax return, summarizing their cross-border related party transactions. HMRC plans to develop an IT system to make submitting this schedule efficient and integrated with the corporation tax return process. In the consultation’s Annex B, a draft ICTS format (currently an Excel-based template) illustrates the kind of information that would be collected. By the time of implementation, this would likely be an online form or attachment in HMRC’s digital tax filing portal. This is how HMRC plans to handle the scale of additional data from medium-sized businesses – by automating risk assessment. The ICTS data will feed into HMRC’s algorithms to flag high-risk transfer pricing cases, allowing the tax authority to focus its audits where they’re most needed rather than manually sifting through reports.

In summary, if the proposals are adopted, medium-sized businesses will see new rules written into tax law (probably effective in a year that gives some transition period), and HMRC will roll out a new schedule and guidance so that companies can report the required information alongside their usual tax filings.

Consultation and Feedback Process

HMRC’s consultation process is a crucial part of shaping these changes. As noted, the current consultation opened on 28 April 2025 and closes on 7 July 2025. The consultation document (titled “Transfer Pricing – Scope and Documentation”) poses various questions to stakeholders about the potential impacts and design details of the proposals. Business owners, industry groups, and advisors are encouraged to submit comments or attend the dedicated sessions (for example, HMRC held an in-person seminar in London on 22 May and online webinars on 3 and 18 June 2025). These forums allow stakeholders to raise concerns – for instance, about the compliance costs for mid-size firms or how to define certain terms – and to suggest practical solutions.

It’s worth noting that this is the first time HMRC has specifically consulted on removing the medium-sized business exemption.

Previous transfer pricing consultations in recent years dealt with other topics (like technical tweaks to rules and documentation for large multinationals), but medium-sized enterprises’ exclusion has not been reviewed until now. However, the idea of a standardized schedule for international transactions isn’t entirely new – HMRC floated a similar concept (an “International Dealings Schedule”) back in 2021. At that time, businesses expressed concerns about duplication and burden. HMRC claims to have incorporated that feedback into the revamped ICTS proposal. For example, the ICTS is designed to capture mostly objective, readily-available data (things a company would likely have in its transfer pricing documentation anyway) to minimize any new work. The consultation asks whether the right balance is struck and if there are ways to refine the schedule further.

After July 2025, HMRC will review all input and publish a response document. We can expect this report to outline what the government heard from businesses – e.g. the concerns of medium firms – and whether any adjustments will be made to the plan. If proceeding, the government will then include the finalized measures in a Finance Bill. Stakeholder feedback is likely to influence details like: the exact thresholds or exemptions in the reporting requirement, how “associated enterprises” are defined for small business groups, whether there will be a grace period or soft landing for newly affected companies, and how HMRC can simplify compliance (the consultation, for instance, invites views on simplifying the treatment of transactions with certain non-qualifying territories that currently pull SMEs back into the rules).

Business owners should keep an eye out later in 2025 for HMRC’s summary of the consultation and any draft legislation. There may be another opportunity to comment if draft laws are published. Being engaged in this process can help ensure that the final rules consider the practical realities for medium-sized companies.

Impact on Medium-Sized Businesses

For medium-sized businesses, the anticipated impact of these changes is significant. Essentially, companies that previously didn’t have to formally worry about transfer pricing will now be responsible for it in the same way large multinationals are. In practical terms, medium businesses will need to:

• Review and potentially adjust intercompany transactions: If you have transactions with overseas sister companies, parents, or subsidiaries, you’ll need to ensure the prices charged (for goods, services, royalties, loans, etc.) are equivalent to what unrelated parties would charge. Some firms may need to introduce or revise intercompany charges to reflect market rates. For example, a UK company that sells products to its foreign affiliate will have to justify that the sales margin is reasonable, or if a UK entity receives a service fee from a related company, that fee should be in line with an independent service provider’s fee.

• Implement transfer pricing policies and documentation: Companies will have to maintain evidence that their pricing is arm’s length. This means keeping records such as agreements, invoices, and analysis of comparable market prices. HMRC already expects businesses to have documentary evidence supporting their transfer prices. Medium businesses might need to create formal transfer pricing documentation (like a benchmarking study of profit margins, or a brief Local File report explaining their related-party dealings) where none existed before. Finance teams who have never had to consider transfer pricing before face a steep learning curve. There will likely be a need for training or the help of advisors to understand how to comply and to navigate interactions between transfer pricing and other tax areas (for instance, charging for services could have VAT implications, and adjusting import/export prices could affect customs duties).

• Bear additional compliance costs: Inevitably, complying with transfer pricing rules has an administrative cost. Medium companies may need to devote internal resources or hire external consultants to conduct price analyses, especially if transactions are complex. The documentation and annual reporting (the ICTS) will add to the workload of finance or tax departments. While the government is trying to streamline the process, there will be new ongoing obligations that didn’t exist for these companies before. HMRC acknowledges this but believes medium-sized firms have the capacity to handle it – many are already part of international groups with transfer pricing frameworks elsewhere.

  
  

All that said, the impact will not be uniform for all mediums. Some medium-sized businesses are already effectively compliant with transfer pricing norms, meaning the step-up may be less dramatic for them. For example:

• Foreign-owned or international groups: If a UK medium-sized company is part of a larger multinational, it may already set its transfer prices according to the parent company’s global policies. Notably, the UK’s SME exemption doesn’t apply if the transaction is with an affiliate in a country that doesn’t offer a similar exemption. So a UK medium firm dealing with, say, a U.S. sister company would likely have been following the U.S. transfer pricing rules (which have no SME carve-out). The rule change in the UK just means HMRC will also expect compliance, but the company’s pricing may already be aligned with the standard.

• Transactions with certain jurisdictions: The UK currently has an anti-avoidance rule that if an SME transacts with a related party in a “non-qualifying territory” (generally, a country without a UK tax treaty or without a non-discrimination clause in a treaty), then the SME exemption doesn’t apply. So medium businesses with affiliates in such places (for example, some low-tax jurisdictions) should already have been applying arm’s length pricing for those dealings. Again, for those businesses the new rules mean extending that practice to all cross-border deals, not just the high-risk jurisdiction ones.

• Profit fragmentation and other anti-abuse rules: Since 2019, the UK has had “profit fragmentation” legislation – essentially a targeted measure often dubbed “transfer pricing for SMEs”. It requires SMEs to prove that certain profits shifted to related entities (often overseas) reflect real arm’s-length arrangements, or else those profits can be taxed back in the UK. Moreover, general tax principles like the “wholly and exclusively” rule already prevent a UK business of any size from deducting an expense that isn’t genuinely for its own business purpose (for instance, paying a related company’s costs without business justification). These existing rules mean that many medium companies have had to ensure some level of arm’s-length behavior in specific scenarios even while the broad exemption was in place.

  
  

In light of the above, certain medium-sized companies may find they are part-way there: they might have informal documentation, or they’ve only needed to worry about transfer pricing for one or two particular transactions until now. The change will require them to adopt a more systematic and comprehensive approach. For finance directors and controllers, this is likely the biggest impact – moving transfer pricing from a footnote to a regular compliance item on the yearly checklist. As one tax advisor noted, for teams new to this area it will be “a significant learning curve”, and outside help might be needed to understand all the implications.

On the enforcement side, once mediums are in scope, HMRC will have a much larger pool of companies to monitor. The introduction of the ICTS (discussed next) suggests that HMRC will lean on data analytics to flag risky cases. Medium businesses that have unusual profit results or large volumes of related-party transactions might see increased scrutiny or more inquiries from HMRC in the future, whereas those that fall within norms may actually benefit from the new data-driven approach (potentially fewer lengthy audits if nothing looks out of line).

Importantly, truly small businesses (under ~£10 million turnover and 50 staff) will remain exempt from these rules under the proposals. The government chose to maintain the small business carve-out to avoid strangling the smallest firms with compliance costs. So the impact is really focused on the mid-sized tier. If your business is hovering around the small/medium threshold, note that under the new rules you’d have to exceed the limits for two years running before being treated as medium – a helpful provision that prevents sudden one-year growth from immediately triggering full compliance requirements. This gives a buffer to adjust if you’re about to “graduate” into the transfer pricing regime.

New Reporting and Documentation Requirements

With medium-sized enterprises coming into scope, what exactly will these companies need to do in terms of reporting and documentation? The key requirements can be summarized as follows:

• Arm’s length documentation: All in-scope businesses (large and medium) must maintain evidence that their related-party transactions are conducted at arm’s length prices. UK regulations already require that transfer pricing records be kept and furnished to HMRC upon request. In mid-2023, the UK introduced specific rules mandating that the largest multinational groups (typically those meeting the OECD country-by-country reporting threshold) prepare a standardized Master File and Local File documentation package in line with OECD guidelines. Those documents provide detailed information on the global business (Master File) and detailed transfer pricing analysis for the local UK entity (Local File).

• Medium-sized businesses, under current rules, were not obliged to prepare these specific files, but they still needed some form of documentation to defend their pricing. Going forward, medium businesses should be prepared to produce similar documentation if HMRC asks. While they may not be required to have a formal “OECD Master File,” it would be prudent for any medium-sized company with material cross-border transactions to maintain a Local File–type report: basically, an explanation of the company’s intercompany transactions, the pricing method used for each, and justification (such as external comparables or profit analysis) that those prices are reasonable. This documentation isn’t filed with the tax return; rather, it’s kept on hand and must be provided to HMRC on request (typically during an audit). Failing to have adequate documentation can lead to difficulties in disputes and potential penalties.

• Annual International Transactions Report (ICTS): A major new obligation will be the International Controlled Transactions Schedule (ICTS), which the government proposes to introduce as a filing requirement for businesses within the transfer pricing regime. The ICTS is essentially a summary return of a company’s cross-border related-party dealings. HMRC’s plan is that for each accounting period, in-scope companies will complete this schedule and submit it alongside their Company Tax Return (likely as part of the online filing process). The schedule will ask for standardized information such as: the aggregate value of different categories of transactions with foreign related parties (e.g. total sales of goods to overseas affiliates, total purchases, services provided or received, royalties, interest on intercompany loans, etc.), possibly broken down by geographic region or by key counterparties. It will also cover dealings involving permanent establishments (branches) – for example, if a UK company has an overseas branch or a foreign company has a UK branch, those internal dealings might be reported. The goal of collecting this data is to allow HMRC to perform automated risk assessments. By structuring the data in a consistent format, HMRC can use software to flag anomalies or high-risk indicators (such as a large volume of payments to low-tax jurisdictions, or profit margins that seem out of line). This helps target HMRC’s inquiries more efficiently and, ideally, encourages companies to comply “up front” knowing that HMRC will have a detailed view of their related-party transactions.

• Thresholds and exemptions for reporting: Not every company will have to complete every line of the ICTS. The proposals sensibly include materiality thresholds to avoid excessive reporting of trivial transactions. For instance, if a business has only a very small amount of cross-border trading with affiliates, it may be exempt from filing the schedule at all. The draft suggests that if total cross-border related-party dealings are under £1 million for the year (and none of those transactions involve a high-risk “non-qualifying” country), the company would not need to file an ICTS. This provides relief for companies with only minimal intercompany transactions. Even when an ICTS is required, there may be de minimis thresholds for reporting specific categories of transactions – e.g. categories of transactions below £100,000 in value might not need detailed disclosure. Larger groups that already have to produce the full Master File/Local File/CbC reports might be allowed higher thresholds (the consultation floats a £1 million threshold per category for those large groups, recognizing that they are already heavily reporting elsewhere). Additionally, certain transactions like intercompany loans might have their own threshold rules (for example, only report loans over a certain balance or with significant interest amounts). The exact numbers may be adjusted after consultation, but the principle is that very small transactions won’t trigger exhaustive reporting, focusing the compliance effort where the actual tax risk is more meaningful.

• Format and submission: Initially, HMRC has provided a draft ICTS in spreadsheet form (as Annex B to the consultation) to illustrate the format. However, by implementation time, we can expect this to be an integrated part of the digital tax filing system (likely similar to how the corporation tax return has supplementary pages). HMRC has indicated it would develop an IT solution for businesses to capture and submit the required information efficiently. So, rather than a free-form report, it will be more like filling out a structured form online or uploading a template. This should make it relatively straightforward for companies to comply, especially if their accounting systems can generate the needed figures. For example, a company might pull a report of all intercompany charges for the year and slot totals into the categories on the ICTS. The structured nature also means HMRC isn’t asking for lengthy narratives in this schedule – it’s mostly numbers and short descriptions, which aligns with data that “should generally be found in a Local File anyway. In fact, HMRC has suggested that if the ICTS is introduced, they might adjust documentation requirements so that some information reported in the ICTS need not be duplicated in the Local File, to streamline compliance.

  
  

In summary, medium-sized businesses should be prepared for two layers of compliance:

1. Maintain robust internal documentation to justify pricing (just as a safeguard if HMRC inquires, and to ensure you’re calculating tax correctly). This is more of an internal preparedness step, guided by OECD best practices and HMRC’s guidelines.

2. Annually report key transaction data through the ICTS filing. This is a new outward-facing requirement that will put your transfer pricing profile on HMRC’s radar every year.

   
   

The combination of these means that transfer pricing will shift from an optional or dormant consideration for SMEs to a regular part of the statutory accounting and tax compliance cycle for medium businesses.

For a business owner, this may sound daunting, but there are upsides to having a clearer framework: it reduces uncertainty and the risk of surprises. If you proactively align your intercompany pricing with market rates and document your approach, you are less likely to face major adjustments or disputes with the tax authority later. The introduction of standardized reporting may also level the playing field – HMRC will be looking at everyone’s data (not just targeting the largest firms), which might deter any outlier behavior and promote fair competition.

Next steps: Business owners of medium-sized companies should start reviewing whether they have any connected-party transactions that could be within scope. If so, it’s wise to begin gathering information and seeking advice on transfer pricing. Even though the rules aren’t in force yet, early preparation will make the eventual transition smoother. Keeping informed about HMRC’s final decisions after the consultation (due later in 2025) is also important, as the exact requirements and start date will be confirmed in that announcement. By understanding the forthcoming changes and organizing your documentation, you can turn what might seem like a compliance burden into a routine part of good financial governance for your growing business.