Transfer pricing, PE and DPT: consultation outcome

As part of the November 2025 Budget, HMRC published its consultation outcome on reforms of transfer pricing, permanent establishment (PE) and diverted profits tax (DPT), including a summary of responses received to the earlier consultation document. The consultation response confirms that the proposed reforms will come into force broadly as originally proposed with effect from 1 April 2026. However, a number of changes to the detail have been accepted and legislation now included in the Finance Bill 2025/26. Perhaps most surprising was the lack of any announcement on the extension of transfer pricing to medium sized companies, which will not form part of the reforms.

The UK government has also introduced the International Controlled Transactions Schedule (ICTS), an annual filing requirement to support HMRC's automated risk assessments and expected to take effect for accounting periods beginning on or after 1 January 2027. Consequently, businesses within the scope of these requirements are advised to ensure that their transfer pricing policies are robust to withstand increased scrutiny from HMRC and their systems are able to extract the relevant data to meet the new requirement.

Background

In 2023, the UK government carried out a consultation on various changes to international aspects of the UK tax regime, including transfer pricing, DPT and the PE rules. Following feedback, a 2024 consultation response document confirmed that the government would be taking forward some of the proposed changes with others subject to further consideration and consultation. It was expected that further consultations would take place during 2024 on draft legislation where the government intended to move ahead with its proposals.

Following the general election in 2024, the new, incoming government indicated, as part of its Corporate Tax Roadmap, their plan to engage in further consultations on these reforms. This resulted in a number of documents and draft legislation published in April 2025, including

• a further consultation together with draft legislation on changes proposed to be made to the UK transfer pricing, DPT and PE rules.
• as a result of the broadening of the PE definition, proposed changes to the investment manager exemption (IME) to clarify and simplify its operation, as well as updating Statement of Practice 1/01
• a separate transfer pricing consultation on restricting the current transfer pricing exemption for SME to small companies only and adding additional transfer pricing documentation requirements.

Further details of the April 2025 consultations can be found in our earlier Insights article.

Consultation response: transfer pricing

Perhaps the biggest surprise was that, contrary to expectations, there was no announcement that the government will amend the threshold to limit the exemption for Small to Medium Enterprises (SME) from the UK transfer pricing rules. The April 2025 consultation had suggested restricting the exemption for SMEs to small companies only. The current definition of "small" relates to companies with staff headcount no greater than 50 and either turnover or balance sheet total no greater than €10m.

The government proposed changes to the participation condition (the rules determining whether persons are connected for TP purposes) to broaden them to apply to three identified gaps: where two persons are subject to an agreement for common management; an anti-avoidance provision to deal with arrangements where the main purpose is to avoid meeting the participation condition; and a power to allow HMRC to direct a taxpayer to file on the basis that the participation condition is met (where there would be participation under OECD Model Treaty rules but not under domestic legislation).

In response to feedback, the government has taken the following steps to address concerns raised in relation to these proposals:

• the concept of common management has been narrowed in the draft legislation to target structures with a legal arrangement, a unified senior management, and shared economic outcomes through a defined mechanism
• the power for HMRC to issue transfer pricing notices where there would be participation under the OECD Model Tax Treaty will be retained. However, it will be made clear in legislation that such notices apply in relation to the chargeable period in which it is given and subsequent chargeable periods. This is an area where it is to be hoped that HMRC provide guidance clarifying the circumstances in which they may seek to apply this new power.  
• the anti-avoidance provision will be retained, with further detail on how it will apply provided in guidance.

Respondents supported the decision to repeal UK-UK transfer pricing, subject to exclusions. Concerns over the ability of HMRC to issue a notice disapplying the exemption will be dealt with by clarifying the legislation to make it clear that HMRC will only give a notice where it is necessary to avoid a net loss of UK tax and HMRC will confirm in guidance how the power will be utilised. Otherwise the government will introduce the exemption in the way proposed.

There was also general support for the alignment of UK TP rules relating to financial guarantees with the OECD transfer pricing guidelines. However, respondents sought further guidance on how, in practical terms, the rules will operated and the response confirms that HMRC will provide further guidance on this. Transitional rules for guarantees and securities will apply to new financing from this date from 1 April 2026, or to all financing from periods starting on or after 1 January 2028, unless an earlier election is made.

The response confirms that there was no intention to extend the "acting together" provisions to non-financial transactions and the legislation will be changed. In addition, HMRC will publish guidance on areas of uncertainty.

Consultation response: PE

The consultation response confirms that the definition of PE will be updated to match Article 5 of the 2017 OECD Model Tax Convention and the attribution rules will be revised in line with Article 7, supported by OECD commentary and reports. To provide further clarity, the draft legislation has been amended so that it directly replicates the wording of the OECD Model Tax Convention and HMRC will provide further details in guidance to be published.

Alongside broader reforms to the UK domestic PE rules, the response document provides further detail on the update of the UK's investment manager exemption (IME), a core part of the UK's offering as a jurisdiction from which investment managers can operate.

In light of feedback to the previous consultation on draft legislation and guidance (see our response at IME and SP1/01: Simmons response to consultation), it was confirmed that the narrowing of the IME by reference to transactions undertaken by investment funds was unintended and that the final legislation should not include this restriction. In addition, the legislation will make clear that where an investment adviser would otherwise amount to a UK permanent establishment of a non-resident, that adviser will also be able to rely on the IME. The government does not intend, at this stage, to adopt broader limitations to the income tax charge for non-resident companies as had been proposed by industry.

The government also confirmed that it would take on board feedback on the revised Statement of Practice 1/01, with an updated version being released before the revised legislation enters into force covering all of the issues raised in the consultation (although the detail of these updates was not set out). That revised draft has since been published in HMRC's International Manual at INTM269210

Consultation response: DPT

The DPT regime will be fundamentally changed, with the standalone DPT charge repealed and replaced by a new Corporation Tax charging provision for unassessed transfer pricing profits (UTPP). The new regime retains the essential features of DPT, including the two gateway tests (effective tax mismatch outcome and tax design condition), but is intended to be simpler and to allow access to the UK's treaty network, including the Mutual Agreement Procedure (MAP).

In relation to DPT, the consultation response confirms that the government will legislate to clarify the interaction between DPT and transfer pricing rules to ensure that profits taxed under DPT are not also subject to transfer pricing adjustments. In general, however, the response document confirms that the government intends to proceed broadly on the basis of draft legislation published in April 2025, rejecting the majority of responses and suggestions put forward by respondents.

International Controlled Transactions Schedule (ICTS)

In addition to the changes to transfer pricing, PE and DPT rules, the government also announced in the Autumn Budget that it will introduce a new annual filing requirement for in-scope multinational businesses: the International Controlled Transactions Schedule (ICTS). The ICTS will apply to UK resident businesses within the scope of transfer pricing legislation (which currently excludes SMEs), UK resident businesses with foreign permanent establishments and foreign businesses with a UK permanent establishment.

The ICTS will capture specific factual information about relevant cross-border related party transactions in a standardised format. The information required for submission includes details typically found within a transfer pricing local file.

The information is intended to be used for automated risk profiling and manual risk assessment by HMRC compliance teams.

The ICTS is expected to be required for accounting periods beginning on or after 1 January 2027, with the commencement date and detailed requirements to be set out in future regulations following the Finance Bill 2025-26.

Next steps

The changes to transfer pricing, PE and DPT will generally apply for accounting periods beginning on or after 1 January 2026. Legislation has been included in the Finance Bill 2025/2026.

Comment

The legislation marks a pivotal development in the evolution of the UK's international tax framework, resulting from numerous consultations since the initial transfer pricing documentation review consultation in 2022.

For businesses, the reforms present a mixed landscape. Many will welcome the general exemption from UK-UK transfer pricing, which should reduce compliance complexity for domestic transactions, and the increased certainty provided by bringing Diverted Profits Tax (DPT) within the corporation tax regime with the resulting ability to access to the Mutual Agreement Procedure (MAP).

However, the introduction of the International Controlled Transactions Schedule (ICTS) signals a significant shift in HMRC's approach to transfer pricing compliance and enforcement. The ICTS will impose a substantial new annual reporting obligation on UK-based multinationals, requiring the collation and submission of detailed transfer pricing data in a standardised format. This will necessitate robust data management, systems, and governance processes to ensure accurate and timely compliance.

From a tax disputes perspective, these changes underscore HMRC's increasing reliance on automated, data-driven risk assessment tools to identify and target transfer pricing risks. The enhanced transparency and granularity of information provided through the ICTS will likely lead to more focused and efficient HMRC enquiries, with a greater emphasis on early detection and resolution of potential issues.

In this new environment, prevention is undoubtedly preferable to cure. Businesses should proactively review and strengthen their transfer pricing policies, documentation, and internal controls to ensure they are defensible under heightened scrutiny. The ICTS raises the bar for compliance and dispute readiness. We recommend that clients monitor the developments on the ICTS (a further consultation on the draft secondary legislation is expected in Spring 2026) and assess the impact of these changes on their operations now, to ensure they are well-prepared ahead of the implementation of the ICTS.