United Kingdom: New transfer pricing documentation requirements enhance HMRC's information gathering powers and taxpayers' penalty risks

In brief

On 20 July 2022, the UK government published draft legislation in relation to transfer pricing documentation requirements for large UK taxpayers. This draft legislation intends to make it a requirement for large taxpayers that meet the threshold for Country-by-Country Reporting (CbCR) to prepare a master file and local file together with a summary audit trail (SAT) questionnaire.

This new measure will apply to taxpayers with accounting periods commencing on or after 1 April 2023.  There will be a presumption of careless inaccuracy, with tax-geared penalties, where taxpayers fail to maintain and produce these records after this date.

HMRC also set out revisions to ensure that relevant transfer pricing documents can be requested outside of an enquiry and UK taxpayers are required to produce these records even when they are in the "possession or power" of another non-UK member of a multinational (MNE) group. Furthermore, the revisions also provide HMRC the power to specify, by regulations, the form and manner in which transfer pricing records are kept and preserved.

As drafted, the proposals grant greater information gathering powers to HMRC, increase the compliance burden by means of master file, local file and SAT questionnaire preparation and enhance risks for MNE groups as a result of the rebuttable presumption of careless inaccuracies if taxpayers fail to do the work necessary to maintain relevant records and/or produce those records on request.


In March 2021, the UK government launched a 10-week consultation to seek views on updating the UK transfer pricing documentation requirements. The consultation explored whether large businesses with a UK presence should be required to maintain, and produce upon request, master file and local file documentation per the Organisation for Economic Co-operation and Development (OECD) standardised approach. The government also explored the idea of introducing a supplemental evidence log (similar to those submitted under the UK's Profit Diversion Compliance Facility) and an International Dealings Schedule (IDS). 

In November 2021, the government released a summary of the respondents' views and provided a preliminary response to certain areas of the policy (Summary of Response Paper). Key outcomes from this were that:

  • Large UK taxpayers will be required to prepare a master file and local file in line with the OECD's BEPS Action 13 requirements (incorporated in the OECD Transfer Pricing Guidelines 2022).
  • An SAT questionnaire will need to be prepared in addition to the master file and local file requirement.
  • The government confirmed that it will not implement, or consult further, on the requirement to prepare an IDS, although this will be kept under review. 

New UK transfer pricing documentation requirements


Businesses that will be in scope of the proposed measures are those with a taxable presence in the UK (for example, through a UK incorporated company or permanent establishment) and are within the CbCR regime (with a global revenue of EUR 750 million or more).

Master file and local file

On 22 July 2022, the UK government published provisions of the Finance Bill 2023 introducing obligations for large taxpayers to prepare a master file, local file and an SAT questionnaire. 

Once enacted, the legislation will add transfer pricing documentation to the existing list of tax records that companies are required to retain and produce. 

While the policy paper and explanatory notes to the Bill both make it clear that the intention is to introduce new requirements only in form of a master file, local file and SAT questionnaire, the legislation may apply more broadly to any records, documents and information that HMRC could reasonably consider as necessary to calculate the MNE taxpayer's profits or losses under the UK transfer pricing rules.

Prior to these proposals, the UK had implemented the CbCR as the minimum requirement for certain taxpayers and did not introduce specific requirements regarding the master file and local file on the basis that the UK had existing broad record keeping requirements. The primary objective in adopting the additional recommendations from the BEPS Action 13 Final Report is to provide a consistent approach with international standards and greater certainty for UK taxpayers regarding the appropriate transfer pricing documentation they need to retain. 

The form and content of a master file and local file is set out in annexes to the OECD Transfer Pricing Guidelines 2022. These are required to be submitted within 30 days upon request, along with a completed SAT questionnaire. 

Reporting thresholds are expected to apply and are intended to align as closely as possible with the OECD standard, which specifies that the focus should be on material transactions. Further guidance is expected to be published with practical examples and key principles to help taxpayers determine what might be considered material and guide taxpayers in borderline cases. 

SAT questionnaire

In the Summary of Response Paper, HMRC confirm that it will not require a detailed evidence log to be included in the UK local files. Alternatively, HMRC propose to include an additional requirement for UK taxpayers to prepare a SAT questionnaire which goes beyond the measures set out in BEPS Action 13.

The SAT questionnaire is intended to be a short, concise document summarising the work undertaken by the taxpayer to form the basis of the conclusions contained in their transfer pricing reports. 

Effectively, the SAT questionnaire is HMRC's attempt to adopt a more streamlined "data centric" approach in their transfer pricing compliance and risk assessment processes, allowing them to identify and focus on higher risk areas during enquires without imposing a disproportionate burden on taxpayers. 

Proposed revisions to the existing legislation 

Record keeping obligations

While UK taxpayers are already required to keep and retain sufficient records to support their filed position, the new provisions prescribe the format in which transfer pricing records must be kept. 

The legislation will specify that, as a minimum, the master file, local file and SAT questionnaire must be kept and preserved. Additionally, MNEs will have a duty to keep and preserve "relevant transfer pricing records", which are defined as records that HMRC reasonably consider to be necessary to calculate the MNE taxpayer's profits or losses under the UKs transfer pricing rules.

HMRC's information gathering powers

The draft legislation primarily introduces additional information gathering powers to HMRC as transfer pricing documentations will now be within the scope of HMRC's Schedule 36 information gathering powers. In other words, HMRC will now be able to exercise their legal power and issue UK taxpayers with written Schedule 36 notices requesting specified transfer pricing information or documents. 

Crucially, the changes mean that even if the company that receives HMRC's request does not itself have "power and possession" over the documentation requested, it cannot refuse HMRC's request if other members of its group (whether UK or non-UK) is in possession of those records.

Inaccuracies and penalties

Under the new measures, failure to maintain and provide specified transfer pricing records upon request will lead to a rebuttable presumption of careless inaccuracy and subject to the ordinary penalty regime for inaccuracies in tax returns. The draft legislation therefore formalises HMRC's existing presumption that taxpayers who fail to keep adequate records are careless. Accordingly, there is an increased risk that tax-geared penalties could be levied if further tax becomes payable as a result of a transfer pricing adjustment. 

Impact of the new legislation

In some respects, the proposals go beyond the standards set out in BEPS Action 13. At minimum, the UK will be on par with existing international standards.

In the five years between 2015/16 and 2019/20, HMRC brought in over GBP 6 billion in additional tax from transfer pricing compliance activities, demonstrating the significant area of risk for HMRC and large UK taxpayers. 

It is unsurprising therefore, that the proposals extend HMRC's information gathering powers which support their motivation to carry out more informed risk assessments, deploy resources more efficiently and reduce the time taken to establish the facts in compliance interventions.   

Although the UK did not adopt the three-tiered approach (i.e., master file, local file and CbC Report) outlined in BEPS Action 13 into domestic legislation historically, MNEs that are required to submit CbC reports will also likely have prepared and/or have the information and resources to prepare master file and local file reports. Accordingly, the expectation is that the requirement to prepare a master file and local file may not create a significant additional burden for UK taxpayers. However, the legal requirement to produce these records and an additional SAT questionnaire within 30 days of request may prove challenging. 

More notably, the risk of penalties will inevitably increase for MNEs, as failure to produce specified transfer pricing documents will lead to the presumption that an inaccuracy is careless and subject to tax-geared penalties, which can only be displaced if the taxpayer can demonstrate that reasonable care was taken. Moreover, the presumption of carelessness could be another way through which HMRC are able to extend their time limit to issue a discovery assessment.

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