Executive summary

Following the Autumn Budget, Finance (No.2) Bill (the Bill) was published on 4 December 2025. It contains a number of important updates to transfer pricing rules in the United Kingdom (UK) and adjacent areas of taxation. This Alert focuses on some of the most important areas for corporate taxpayer awareness and readiness. The Bill has not been passed as of the date of the Alert and indeed is not expected to be enacted until March 2026. There may be changes to its provision, although changes to the transfer pricing rules are not anticipated at this time. (See also, EY Global Tax Alert, UK introduces Budget 2025, dated 2 December 2025.)

The changes introduced by the Bill represent the most material update of UK transfer pricing rules since 2004. Although many of the changes are directed at providing greater alignment to Organisation for Economic Co-operation and Development (OECD) principles, the Bill provides a significant relaxation in respect of UK-UK transactions, a new emphasis on arm's-length pricing of intangible fixed assets (IFAs) in transactions between connected parties and a new unassessed transfer pricing profits (UTTP) regime. There is no change in the current general exemption for small and medium-sized enterprises (SMEs) from UK transfer pricing rules. For financing arrangements, the existence of implicit guarantees is now codified for the purposes of establishing arm's-length interest rates. The Government will consult on the introduction of an International Controlled Transactions Schedule will be consulted on with a view to it being effective for accounting periods beginning on or after 1 January 2027.

Reform of transfer pricing

Most of the transfer-pricing changes in the Bill have been the subject of a process of consultation for which the stated aims of His Majesty's Treasury were to simplify the existing rules, address legislative weaknesses and more closely align the rules to international standards.

Most of the changes take effect for chargeable periods beginning on or after 1 January 2026, subject to certain transitional rules.

International Controlled Transaction Schedule

The Commissioners for His Majesty's Revenue & Customs¹ (HMRC) are to be given the power to issue regulations requiring that "specified" persons report "specified" information to HMRC "in connection with specified international controlled transactions" (paragraph 20 of the Bill). Regulations will require in-scope multinationals to submit an International Controlled Transaction Schedule (ICTS) as part of corporate tax filing obligations in the UK and will take effect for accounting periods beginning on or after 1 January 2027. Technical consultation on its design will take place in spring 2026.

Intangible Fixed Assets

Intangible Fixed Assets (IFAs) are currently subject to their own, largely accounting-led, tax regime within the Corporation Tax Act 2009, which broadly allows IFAs to take the accounting value unless transfer pricing applies and an arm's-length value would be higher.

If a cross-border transfer is subject to UK transfer pricing rules, it will instead be treated as taking place at the arm's-length price as the sole standard. A cross-border transfer broadly refers to a transfer of an IFA in which the related party is a foreign permanent establishment, a non-UK resident company, a non-UK resident individual or a partnership with all non-UK-resident partners. If the profits and losses are amended as a result of transfer pricing, the arm's-length price is applied to both the transferor and transferee.

The arm's-length price will apply instead of market value, regardless of whether the requirement for a potential advantage in relation to UK taxation is met. For transfers of IFAs, adjustments can continue to be made to increase or decrease the price charged. This approach differs from the "one-way street" principle² generally applied to UK transfer pricing adjustments.

This change may result in a greater need to assess the positions of each party to an IFA transaction, particularly if there are factors that indicate the arm's-length price would differ from market value.

Exemption for UK-UK transactions

The Bill introduces an exemption from arm's-length transfer pricing requirements for UK-UK transactions. This is subject to qualifying criteria, including that both potentially advantaged persons must be companies, UK resident, chargeable to the statutory rate of corporation tax and use the same reference currency.

The intention is for the exemption to apply if both persons are taxed under similar regimes at the same rate, with exchange gains and losses calculated in the same reference currency. The exemption will not apply if there is a patent box provision or if certain financial instruments introduce tax asymmetry. The taxpayer may elect to disapply the exemption for a chargeable period and in respect of particular provisions.

HMRC can give notice to a taxpayer to refile its tax return with domestic transfer pricing if it is "expedient" for the collection of tax.

Participation condition

Participation in the management, control or capital of an entity is a basic gateway to "connectedness" for the purposes of transfer pricing. The Commissioners for HMRC will have the power to issue a transfer pricing notice, which will cause the participation condition to be treated as met from the period in which it is issued.

Whether there is participation will be determined by taking account of all circumstances. This will address situations in which the requirements of sections 157 to 161 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) have not been met, but under the OECD Model Tax Convention there would be participation.

Participation will apply if persons who are acting together collectively have rights and powers that, if held by one person, would indicate that person had control of the entity. Certain rights under financial relationships may create participation if a person has access to income under a complete distribution or assets on a winding up.

Financial transactions

The legislation regarding guarantees will be amended to align UK rules with international standards in light of the publication of more extensive guidance on transfer pricing aspects of financial transactions in the OECD Transfer Pricing Guidelines Ch X as incorporated from 2022.

If one person provides a guarantee with respect to another person's borrowing, the guarantee will not be regarded as arm's length to the extent that it increases the borrowing capacity. Guarantees will, however, be taken into account with respect to the arm's-length interest rate. Implicit support — i.e., the belief that associated enterprises would support a company in a period of financial stress even in the absence of an explicit guarantee — is recognized.

The amendments will have effect from 1 January 2026 for new borrowing only but will have effect for all purposes in relation to chargeable periods commencing after 1 January 2028. Companies may elect to apply the amended rules for chargeable periods ending on or after 1 January 2026 for existing borrowing.

A new irrevocable election under new section 153B TIOPA 2010 will be available to UK-resident companies to be treated as though they have provided a guarantee in respect of an amount of borrowing that would otherwise not have been lent between independent enterprises.

Companies will be able to make a claim not to bring into account a "qualifying credit" if this corresponds to a debit in an earlier period that was not brought into account due to transfer pricing. Similarly, they will be able to make a claim to bring into account a "qualifying debit" that would otherwise be left out of account if it corresponds to a credit in an earlier period that was brought into account and would have been disallowed under transfer pricing had there been a potential UK tax advantage.

Exchange gains and losses

Rules are to be introduced to bring exchange gains and losses on loan relationships and derivative contracts within the scope of the transfer pricing rules. The "one-way street" principle will be relaxed to enable debits that represent a reversal of previous foreign exchange or fair value credits to be recognized.

OECD principles

The Bill clarifies definitions from the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines. Further it provides that specific OECD references are to be read as references to the most recent versions of the materials, adjusted for any reservations, declaration or elections made by the UK on those materials. This includes, for example, the UK's Transfer Pricing Country Profile or any UK observations on the OECD Commentary. This will help to prevent the legislation from becoming outdated over time.

Commissioners' sanction

The requirement for certain notices, assessments and determinations to be sanctioned by the Commissioners at HMRC is to be withdrawn. This is replaced by internal governance processes and is largely administrative.

Unassessed Transfer Pricing Profits

Schedule 5 of the Bill introduces the new Unassessed Transfer Pricing Profits (UTPP) regime.

This is a new charging provision to assess unassessed transfer pricing profits to corporation tax at a higher rate. This legislation is intended to target structured arrangements designed to erode the UK tax base by omitting profits that are subject to transfer pricing. It will replace the previous diverted profits tax (DPT) regime.

The three requirements for the regime to apply are:

• Through a transaction or series of transactions, the company and another person must have made or imposed a provision.
• The company's profits for that provision are subject to a transfer pricing requirement.
• There is a difference between the amounts reflected in the self-assessment and the amount that would be reflected in a self-assessment that reflected the requirement for arm's-length transfer pricing.

Previous DPT criteria are maintained with some refinement. The UTPP must arise from a provision that results in an effective tax mismatch outcome (a quantitative test based on relative tax rates); the tax design condition must be met; and the unassessed transfer pricing profits must not arise wholly from an excepted loan relationship arrangement. The tax design condition will be met if it is reasonable to assume that the structure is designed to reduce, eliminate or delay any person's liability for UK tax and the stated intention is to target contrived arrangements.

The UTPP rate is the rate that would have applied to the unassessed transfer pricing profits if they had been added to the company's tax return plus 6%. For the purposes of this calculation, any loss-making position is adjusted to zero.

It is expected that affected taxpayers will continue to self-disclose and potentially make use of the Profit Diversion Compliance Facility to make transfer pricing adjustments and avoid the additional UTPP rate. UTPP is designed to be within the scope of Double Tax Treaties and thus mutual agreement procedure (MAP) relief should be available where appropriate.

New guidance as to how the UTTP regime will be operated has been issued at INTM489100 - Transfer Pricing - Unassessed Transfer Pricing Profits: Contents - HMRC internal manual - GOV.UK

Permanent establishments

Schedule 7 amends legislation dealing with the attribution of profits to permanent establishments to bring it more into line with internationally agreed principles. The changes reduce uncertainty over the interpretation of profit attribution principles under UK domestic law as they make clear which OECD materials and commentary can be used to interpret UK domestic provisions on profit attribution. There are certain changes to the Investment Manager Exemption.

Other relevant Budget developments

Other items relevant to transfer pricing were covered outside the Bill. These are set out below.

Medium-sized company exemption

A published HMRC consultation outcome has confirmed that the exemption for medium-sized companies from the application of transfer pricing rules will not be removed, which provides further certainty for SMEs.³

Correcting taxpayer errors, reducing noncompliance from uncertain tax treatments and behavioral penalties

The UK Government has announced its further intentions and plans for consultations in these areas. Although they are not specifically directed at transfer pricing, because transfer pricing is a complex area of corporate taxation, it seems reasonable to expect that this will be an area in which consultation may be applicable. This is particularly so in the light of Transfer Pricing Guidelines for Compliance GfC7 — "Help with common risks in transfer pricing approaches" — published by HMRC in September 2024 and last updated on 19 December 2025.

Actions

Multinational businesses should prioritize interpreting and applying the changes, particularly given the effective commencement date for many of the new rules of accounting periods beginning on or after 1 January 2026.

Careful consideration should be given to whether transfer pricing rules now apply to particular transactions and entities and whether elections should be made regarding maintenance of UK-UK transactions or in respect of UK guarantors.

Businesses should also be alert to the new arm's-length sole standard for connected party cross-border intangible fixed asset transactions and use appropriate methodologies.

From a compliance perspective, entities should pay attention to details of the International Controlled Transactions Schedule as they emerge, as well as processes established for preparing and reporting required data.

Finally, UK companies should become familiar with the new UTPP regime and consider whether any cross-border transactions may fall within the ambit of these rules.

As ever, HMRC guidance should be monitored as it is updated.