Transfer pricing has applied to transactions between connected UK companies since 2004, with compensating adjustments for the other party. For chargeable periods beginning on or after 1 January 2026, section 164A of the Taxation (International and Other Provisions) Act 2010 exempts most provisions between UK resident companies taxed at the same rate in the same currency, unless a disqualifying condition applies, the company elects out, or HMRC gives a notice to prevent a loss of tax.
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Did transfer pricing always apply between UK companies?
Yes. HMRC’s International Manual at INTM413090 explains that since April 2004 the rules in Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) have applied to dealings between connected UK companies just as to cross border ones, wherever the basic rule in section 147 is met. That rule requires a provision between two persons, a participation condition under section 148, terms that differ from arm’s length, and a potential UK tax advantage.
Before considering any UK to UK point, check the exemption for small and medium sized enterprises in section 166. Most smaller groups fall within it and never needed to adjust UK to UK pricing; see transfer pricing for smaller companies. The UK to UK question is chiefly relevant to large groups.
What changed from 1 January 2026?
Finance Act 2026 inserted section 164A into TIOPA 2010 for chargeable periods beginning on or after 1 January 2026. INTM414320 explains the aim: UK to UK transfer pricing usually produces a tax neutral result once compensating adjustments are made, so the compliance burden is removed except where a net tax loss could arise.
Under section 164A(1) the arm’s length adjustment in section 147 does not apply to a qualifying UK to UK provision. Section 164A(2)(a) to (d) requires, throughout the relevant period:
- both parties to be companies resident in the UK;
- the provision to be relevant to the profits and losses of both, with any profits chargeable to corporation tax;
- each company to be charged on those profits at the same rate as the other;
- both to use the same reference currency for the provision, meaning the currency in which the relevant taxable profits are calculated.
INTM414320 notes that the reference currency is normally the functional currency, but a loan taken through a foreign branch with a different functional currency can fail this test.
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When is the exemption not available?
Section 164A(2)(e) to (h) disqualifies a provision that:
- includes a contract that is not a derivative contract for one party only because of section 589 of the Corporation Tax Act 2009;
- involves profits for which a foreign permanent establishment exemption adjustment is made;
- is a patent box provision, giving relevant IP income to a party that has made an election under section 357A of the Corporation Tax Act 2010 (see patent box);
- involves an excluded company at any time in the period.
Section 164A(5) lists excluded companies. They include oil ring fence and oil contractor companies, life assurance companies, tonnage tax companies, banking companies, open ended investment companies, authorised unit trusts, investment trusts, members of a UK REIT, securitisation companies, qualifying asset holding companies, and residential property developers with residential property developer profits for the period.
Two further routes take a provision outside the exemption. Under section 164A(6) and (7) the company can make an irrevocable election, either for a particular provision or for the whole period. Under section 164A(8) to (10) HMRC can give a transfer pricing notice, but only where it is expedient to avoid a loss of tax, judged by looking at both companies together. INTM414330 confirms that such a notice can only follow a notice of enquiry, that the company can appeal, and that case teams must refer proposals to HMRC’s Business, Assets and International Transfer Pricing team.
Why would HMRC still want to adjust?
INTM413090 gives the classic risk. A UK group company with losses that can no longer be group relieved lends to a profitable fellow member at an excessive rate. The borrower’s extra interest deduction saves tax, while the lender’s extra income is sheltered by its losses, so the group effectively uses losses it could not otherwise use. That is the kind of net loss of tax the notice power is designed to prevent.
The exemption also does not switch off other rules. Interest can still be restricted by the corporate interest restriction, and the connected company rules for loans in intercompany loans and tax still apply. For intangible fixed assets, INTM414020 explains that from 1 January 2026 transfers and licences outside the cross border transfer pricing rules are valued at market value.
How do compensating adjustments work?
Where the exemption does not apply, the advantaged company increases its profits to the arm’s length figure. Section 174 then lets the other party, the disadvantaged person, claim to compute its own profits on the same arm’s length basis, if only one party is advantaged and the other is within the charge to corporation tax or income tax on the relevant profits. Section 174A blocks a claim where the disadvantaged person is an individual and the advantaged person is a company.
The conditions are strict:
- The advantaged company must go first. Section 176 allows a claim only once that company’s return, or an HMRC notice, uses the arm’s length figure, and the claim must be consistent with it.
- Two year window. Section 177 requires the claim within two years beginning with the day the advantaged company made its return, or the day HMRC gave the relevant notice, and allows the claim to be amended if a later notice changes the figure.
- Time limits are overridden. Section 174(2)(b) allows the adjustments despite normal time limits.
INTM412140 adds that a compensating adjustment does not move any cash. Under section 196 a balancing payment from the disadvantaged to the advantaged company, up to the amount of the adjustment, is neither taxable nor deductible and is not a distribution. There is no obligation to make one.
For loans and guarantees there are refinements. A UK guarantor may be able to claim under section 192, and INTM414520 explains that section 175 treats borrowing that would not have been lent without a related party guarantee as lent to the guarantor, which can limit the lender’s claim. For the borrowing rules themselves see thin capitalisation and intra group debt.
How does this look in practice?
Illustration only. Two UK sister companies in a large group, both paying corporation tax at the same rate in sterling, have 31 December year ends. Company P pays Company Q a management fee of £500,000; an arm’s length fee would be £200,000.
| Year | Company P | Company Q |
|---|---|---|
| 2025 (old rules) | Adds back £300,000 in its return | May claim to reduce its income by £300,000 within two years of P’s return |
| 2026 (section 164A) | No adjustment if no disqualifying condition applies | No claim needed |
If Q had losses it could not otherwise use, HMRC could open an enquiry and give a notice under section 164A(8), restoring the adjustment for P and the compensating claim for Q.
What should groups watch for?
- Testing each condition for the whole period, including the rate and currency tests and excluded company status of both parties.
- Remembering the exemption runs from chargeable periods beginning on or after 1 January 2026, not from 1 January 2026 itself.
- Treating an election out as permanent for that provision or period, because it cannot be revoked.
- Missing the two year window for a compensating adjustment under the old rules or where a notice is given.
- Recording why the exemption applies, which also supports any local file exemption explained in transfer pricing documentation.
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Related Accountapedia entries
- The CT600 company tax return explained
- Dividends received by companies: the exemption
- Company trading losses: carry back and carry forward
- Corporation tax rates explained
- Non trading loan relationship deficits
Sources
- GOV.UK: Manual page INTM413090
- GOV.UK: Manual page INTM412020
- legislation.gov.uk: Act 2010 c. 8, section 166
- legislation.gov.uk: Act 2010 c. 8, section 164A
- GOV.UK: Manual page INTM414320
- GOV.UK: Manual page INTM414330
- GOV.UK: Manual page INTM414020
- legislation.gov.uk: Act 2010 c. 8, section 174
- legislation.gov.uk: Act 2010 c. 8, section 174A
- legislation.gov.uk: Act 2010 c. 8, section 176
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.