A new exemption has recently been introduced, removing the need to apply transfer pricing rules to certain transactions between UK companies.

This change has been widely welcomed as a simplification that will remove some of the compliance burden on businesses whilst still protecting the Exchequer against loss of tax revenues.

Nevertheless, UK-only businesses can’t forget about transfer pricing altogether.

What is the UK-to-UK transfer pricing exemption?

The recently enacted Finance Act 2026 introduces several amendments to the UK’s transfer pricing legislation. Many are technical changes that will have limited practical effect, affecting only a small number of businesses. However, two measures have wider significance.

One measure introduces the groundwork for a new reporting requirement, the international controlled transactions schedule, which will increase the compliance burden for affected businesses. The requirement will apply for accounting periods beginning on or after 1 January 2027. Its impact remains unclear as the relevant regulations have not been published at the time of writing.

More positively, an exemption from applying transfer pricing rules to certain transactions between UK companies takes effect for accounting periods beginning on or after 1 January 2026 and will therefore already be in force for many. Where it applies, the requirement to apply arm’s length pricing and undertake benchmarking, documentation and processing obligations may fall away, reducing the cost of compliance and improving certainty.

The exemption is not blanket, and not all UK-to-UK situations will qualify. Other tax rules may need to be considered if transfer pricing falls away. In some situations, the effect of these other rules might cause businesses to elect for the exemption to be disapplied, as permitted by the legislation.

Who and what does the exemption cover?

The exemption only applies to transactions between UK-resident companies that are fully subject to corporation tax on the resulting profits. This restriction does not necessarily prevent the exemption from applying where one or both companies have tax losses.

However, it does not extend to transactions involving partnerships (including LLPs), individuals and trusts. This means, for example, that private equity backed businesses would generally continue to apply thin capitalisation principles when assessing the deductibility of interest payable to shareholders.

Certain types of companies are subject to special tax treatments and therefore fall outside of the exemption. In particular, it may not apply to transactions involving companies that carry on oil and gas, banking, insurance, electricity generation, securitisation or residential property development activities. It also excludes those that have invested into the tonnage tax regime, and certain investment vehicles.

The exemption is also disapplied:

• Where the parties to the transaction are subject to different rates of corporation tax (ie small profits rate v main rate) or compute their taxable profits in different currencies; and
• In some situations where the relevant transaction concerns derivative contracts, exempt permanent establishments or products that give rise to patent box income.

If HMRC considers it necessary to prevent a net loss of UK tax, it can issue a notice requiring transfer pricing rules to be applied to an otherwise exempt transaction.

What are the limitations and exclusions?

The UK-to-UK transfer pricing exemption does not give corporate groups discretion to price UK-to-UK transactions however they wish, nor does it ensure that the tax computation will always follow pricing decisions without adjustment.

Various rules outside the transfer pricing legislation can deem transactions to take place at market value, including the transfer of an asset between related parties not in the same tax group. The distributions rules and the corporate interest restriction legislation may also act to disallow some expenses.

More fundamentally, the exemption does not remove the requirement for deductible trading expenses to be incurred wholly and exclusively for the purposes of the trade. Related party transactions on non-arm’s length terms could give rise to personal tax, company law and accounting issues in some situations.

When might a group elect out of the exemption?

The legislation permits entities to elect for the exemption not to apply in a particular accounting period, either on a blanket basis or in respect of specific matters. Given the reduced compliance burden where the exemption applies, it may not be immediately obvious why a company would wish to do that.

The main reason concerns compensating adjustments. Where a transaction takes place between UK companies, one company may be required to make an adjustment under the transfer pricing rules to increase its taxable profits. In those circumstances, the counterparty will normally be entitled to claim a compensating adjustment to reduce its taxable profits.

Equivalent adjustments may not be available where disallowances arise due to the corporate interest restriction or reclassification as a distribution. This means that electing to disapply the exemption may improve the counterparty’s tax position, often without having a material negative impact on the electing company.

Key takeaways on the UK-to-UK transfer pricing exemption

The new UK-to-UK transfer pricing exemption should ease the compliance burden in a number of cases where transfer pricing has historically applied.

The exemption does not operate in isolation and groups will still need to assess whether it applies to their specific circumstances. If it does, they will need to consider the interaction with other relevant legislation and determine whether there is any benefit to electing out.

Even where changes to the tax system are welcome, working through the full impact is often far from straightforward. To understand how the new exemption will impact your business, please get in touch with Paul Minness or your usual RSM contact.

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