Taxpayer successfully resists TP information requests

The FTT has allowed the taxpayer's appeal against HMRC's Schedule 36 information notice requiring production of its US parent company's consolidated and entity level accounts as part of a transfer pricing enquiry: Lifeplus Europe Ltd v HMRC [2026] UKFTT 797. The FTT agreed with the taxpayer that the documents sought by the notice were neither reasonably required for the purposes of the transfer pricing enquiry nor within the taxpayer's possession or power.

This is a decision that reinforces the need for businesses to have robust transfer pricing policies in place backed up by detailed analysis and supporting data. The FTT was content that the transfer pricing policy put in place in this case was in accordance with OECD guidelines and the company had provided significant amounts of information to HMRC as part of its enquiry to enable HMRC to test the functional analysis necessary to support the chosen transfer pricing methodology. HMRC's request for the US parent company accounts could not be supported as HMRC had failed to show its relevance to that functional analysis and its argument that a different transfer pricing methodology should have been chosen.

Background

Lifeplus Europe Ltd is a wholly-owned UK subsidiary of a US parent company. It was the UK distributor of health and supplement products manufactured and developed by its parent in the US. Most products sold by the group were developed and manufactured by the US parent. In addition, the design and operation of the group business model and the compensation/remuneration model for sales were developed by the US parent. The product line also included a number of third party products which were essentially simply bought in and repackaged. The role of Lifeplus was limited to fulfilling orders from customers and distributing the products that it acquired from its parent.

Historically, no transfer pricing (TP) policy had been in place and Lifeplus had made profits exceeding a 10% profit margin. It appears that the US parent had become loss making and instigated the production of a formal TP policy as a result. The TP report produced used the Transactional Net Margin Method* (TNMM) on the basis that Lifeplus operated as a 'routine distributor' with limited functions and risks. This reduced the level of Lifeplus' profits in the following years, despite an increase in turnover. The enquiry stemmed from HMRC's concerns about the Appellant's falling net profit margins despite increasing turnover. As a result, HMRC carried out an enquiry into Lifeplus' tax position which ultimately challenged Lifeplus's use of TNMM and put forward HMRC's view that the Comparable Uncontrolled Price** (CUP) method was the more appropriate methodology. A particular focus for HMRC was the role of the marketing department at Lifeplus, which the taxpayer contended was simply a support function and was not responsible for selling products or attracting customers. As part of the enquiry, HMRC sought and was provided with extensive information covering accounting periods from 2014 onwards.

Although Lifeplus continued to argue that the TNMM method put forward in its TP report was the most appropriate method, it nevertheless engaged with HMRC's suggested CUP method by putting forward suggested amendments as a means to settle the enquiry. Despite the delivery of extensive information on Lifeplus' activities and the functions of its staff, HMRC continued to regard it as important that it received the US parent company accounts to verify, in particular, the loss making position put forward by Lifeplus. However, the US parent (a privately owned group) refused to provide those accounts on the basis of privacy. As a result, in October 2023, HMRC issued an information notice under Schedule 36 of the Finance Act 2008, requesting:

• Consolidated financial statements of the parent company's group (Eurark LLC)
• The parent company's own entity-level financial statements.

These requests covered accounting periods between 2014 and 2022.

HMRC had also sought to acquire these earlier in the process through the use of an Exchange of Information request under the UK/USA double tax treaty, but this had been rejected by the IRS.

Lifeplus appealed against the issue of the information notice arguing that (a) it was not reasonably required for the purposes of the TP enquiry and (b) in any event the US parent company accounts were not within its possession or power.

FTT decision

The question whether the documents were "reasonably required" by HMRC for the purposes of the TP enquiry required consideration of the TP rules, including those set out in the OECD TP Guidelines. The focus of HMRC's enquiry was essentially its belief that a CUP analysis was more appropriate than a TNMM method. Lifeplus argued that there was no 'rational connection' between the contents of the US parent accounts and the question of whether it should have selected the CUP transfer pricing method, instead of the TNMM method. Moreover, HMRC had received extensive documentation and evidence of the functions carried out by Lifeplus and its employees. HMRC's interest in the US parent accounts largely appeared to depend on evidencing the fact that it had been loss-making and looking at its profit margins. However, the FTT were content that the TP analysis carried out by Lifeplus had been consistent with OECD guidance and that the choice of the TNMM method had been one that the company had been entitled to utilise. It was clear, not least from HMRC's own guidance, that it is not for HMRC to unilaterally impose a selection of the TP method to be used.  

Ultimately, the FTT agreed with Lifeplus that the TP method used did not depend on or rely on the parent company accounts and those financial statements "will not provide further detail on the functional analysis of the entities, nor will they assist HMRC in understanding the functional profile of the business". As a result, HMRC had failed to to establish a sufficient 'rational connection' between the contents of the requested parent accounts and the issue of whether the company should have selected the CUP transfer pricing method instead of the TNMM method. The FTT noted that the OECD TP Guidelines provided (at para 3.22) that, "once a particular one-sided method is chosen as the most appropriate method and the tested party is the domestic taxpayer, the tax administration generally has no reason to further ask for financial data of the foreign associated enterprise".

The FTT was also willing to draw adverse inferences from HMRC's failure to call as witnesses its own TP experts and to rely only on the overall HMRC officer who was not a TP expert. It was clear that HMRC's specialist TP team would have had a significant role to play in HMRC's approach in this case and would have been able to speak to HMRC's decisions in this case.

Possession or power

The FTT also considered the taxpayer's argument that the requested US parent financial statements were not within its possession or power. HMRC's arguments focussed on the argument that the taxpayer had power to obtain those documents. The FTT was satisfied that Lifeplus had made serious attempts to obtain the documents by requesting them and the US parent had refused on the basis that the owners of a US private company were entitled to their privacy and confidentiality under US law. Lifeplus had no enforceable legal right to obtain the parent accounts and the FTT rejected HMRC's argument that since some officers of Lifeplus were also officers of the US parent meant that the taxpayer sufficient influence to obtain the documents, noting the principles of separate corporate personality.

As a result, the FTT also concluded that Lifeplus neither had possession nor power to obtain the requested US parent accounts.

Comment

This is an important decision that should be required reading for all who deal with transfer pricing disputes. The case concerns a long-running dispute with HMRC over the choice of methodology where the taxpayer was required to provide extensive disclosure to HMRC to back up its functional analysis in a situation that essentially arose from a significant drop in profitability as a result of the decision by the group to put in place a formal TP policy which fundamentally changed the profit margin of the US subsidiaries.

This case highlights the value of robust transfer pricing documentation in managing HMRC enquiries. The Tribunal confirmed that a well-supported transfer pricing position, underpinned by contemporaneous documentation and aligned with OECD principles, can significantly limit HMRC's ability to demand additional information. Taxpayers should ensure that their transfer pricing policies are supported by clear functional analyses, appropriate method selection, and sufficient evidence of arm's length pricing. Strong documentation not only strengthens a taxpayer's position in disputes but may also reduce the scope for intrusive information requests.

It is also noteworthy that HMRC were criticised and the FTT drew adverse inferences from its failure to call witness evidence from members of its specialist team, even though some of them were present in the room during the hearing.

*The TNMM determines arm's length transfer pricing by reference to a measure of net profitability of unrelated companies that engage in similar activities, under similar circumstances (a 'one-sided' method). The method measures the total return derived from the controlled taxpayer's most narrowly defined business activity, for which reliable data incorporating the controlled transactions under review are available. The TNMM examines the net profit relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realises from a controlled transaction.

**The CUP method compares the price charged for goods or services in a related party transaction to that charged in a comparable third-party transaction in comparable circumstances (i.e. market price). This method uses property or service transactions between unrelated parties to determine arm's length consideration for similar transfers between related parties. This method evaluates whether the amount charged in a controlled transaction is arm's length, by reference to the amount charged in a comparable uncontrolled transaction.