International Tax Reforms: A Strategic Shift in UK Cross-Border Tax Policy

In a move that reflects both post-Brexit independence and global tax alignment efforts, the UK government has announced a package of proposed reforms to its international tax rules. These reforms—targeting transfer pricing regulations and the Diverted Profits Tax (DPT)—form part of a broader agenda to simplify the UK tax system, reduce unnecessary compliance for domestic companies, and sharpen HMRC’s focus on cross-border profit shifting.

The reforms are driven by feedback from businesses, professional bodies, and tax authorities, who have long criticised the administrative burden of applying transfer pricing to transactions between UK-based companies, and the complexity and uncertainty surrounding the operation of the DPT regime.

The government’s aim is twofold: make life easier for UK-based groups conducting domestic transactions, and ensure international groups pay their fair share of tax in the UK. If implemented, these changes would represent the most significant shift in UK international tax policy since the DPT was introduced in 2015.

 

Key Areas of Reform

 

1. Narrowing the Scope of UK-to-UK Transfer Pricing

 

Under current UK rules, transfer pricing applies to all related-party transactions, including those between UK-resident entities. This has created an unnecessary compliance burden for many domestic groups, especially when there is little or no tax risk involved.

The proposed reform would remove the requirement to apply transfer pricing rules to most UK-to-UK transactions, except where:

 

• A tax advantage could arise due to differing tax attributes (e.g. one company has losses, another is highly profitable).
• The transaction is with a non-UK permanent establishment of a UK company.
• Anti-avoidance provisions or treaty-related rules are triggered.

 

This move would bring the UK closer in line with many other OECD jurisdictions that limit the application of transfer pricing to cross-border transactions, thereby aligning the compliance focus with actual tax risk.

Additionally, businesses will still be able to elect to apply transfer pricing voluntarily to UK-to-UK transactions, for example to maintain consistent internal policies or prepare for group audits.

 

2. Reform and Repositioning of the Diverted Profits Tax (DPT)

 

The government proposes to replace the current DPT regime with a more integrated measure within the corporation tax framework. The reformed version would:

Treat profits diverted from the UK as part of the main transfer pricing legislation, rather than as a separate charge.

Allow for clearer interaction with tax treaties, enabling access to Mutual Agreement Procedures (MAPs) and other dispute resolution mechanisms.

Maintain the UK’s ability to counteract aggressive tax planning by multinational groups, while reducing the complexity of having a parallel tax regime.

In effect, this reform would fold DPT into mainstream corporation tax rules, removing the separate charging mechanism and simplifying the process for HMRC and taxpayers alike.

 

3. Potential Removal of Transfer Pricing Exemption for Medium-Sized Enterprises

 

Currently, small and medium-sized enterprises (SMEs) are exempt from UK transfer pricing rules under the de minimis thresholds. The government is now consulting on whether to remove the exemption for medium-sized enterprises, which would bring more businesses within the scope of transfer pricing documentation and compliance.

While small businesses (fewer than 50 employees, turnover and/or balance sheet total below €10 million) would remain exempt, medium-sized businesses—those with fewer than 250 employees and turnover or balance sheet total below €50 million—could face new compliance obligations under the proposals.

 

4. New International Controlled Transactions Schedule (ICTS)

 

To support greater transparency and data-driven risk assessment, the government proposes to introduce a new filing requirement: the International Controlled Transactions Schedule (ICTS).

This schedule would require UK businesses to disclose details of their cross-border related-party transactions, including:

 

• Transaction types and volumes
• Jurisdictions involved
• Transfer pricing methods used
• Whether documentation is available to support arm’s-length pricing

 

The ICTS is expected to be a supplement to the corporation tax return, creating a clearer picture for HMRC of a group’s international tax footprint and enabling targeted enquiries where risks are identified.

 

What Does This Mean for Me? – Impact on UK SMEs and Businesses

 

1. Simplified Rules for UK-Based Groups

 

For UK-based groups operating solely within the UK, the removal of mandatory transfer pricing on UK-to-UK transactions is a major compliance win. Many such groups have had to prepare arm’s-length documentation even when there was no actual tax mismatch. This change will reduce the burden on finance teams and external advisers, freeing up resources for operational activities.

However, groups that benefit from tax attributes (e.g. carried-forward losses or R&D reliefs) should still assess whether intra-group pricing could give rise to tax planning risks that might fall within the exceptions to the exemption.

 

2. New Documentation Obligations for International SMEs

 

Medium-sized businesses with cross-border operations could soon lose their exemption from transfer pricing rules. This would mean:

 

• Preparing full transfer pricing documentation to support intercompany pricing.
• Conducting benchmarking studies or functional analyses.
• Responding to queries from HMRC about compliance.

 

For many UK-headquartered but globally expanding SMEs, this may mark a significant shift in tax compliance strategy, requiring investment in expertise or external advisory support.

 

3. Greater Transparency and Risk of Scrutiny

 

The introduction of the ICTS means that all UK companies with cross-border related-party transactions will have to proactively disclose key transfer pricing data. This will likely increase the number of HMRC enquiries, as the tax authority gains a clearer and more structured view of how businesses price their international dealings.

Companies that have relied on informal transfer pricing methods or minimal documentation will need to bring their practices in line with OECD principles.

 

4. Integrated Treatment of Profit Diversion Risks

 

Replacing the DPT with a streamlined mechanism inside the corporation tax framework will make the rules more accessible and less adversarial, while still giving HMRC the tools to tackle base erosion.

However, multinational groups that previously managed DPT risk separately will need to revisit their overall transfer pricing policies to ensure they remain robust under the new system.

 

Conclusion

 

The UK’s proposed international tax reforms reflect a shift toward targeted, proportionate compliance that prioritises cross-border risk while easing burdens on domestic businesses. For SMEs and growing international groups, the message is clear: tax authorities are demanding greater transparency, consistency, and evidence-based pricing.

Businesses should use this transition period to review their transfer pricing policies, map out intra-group flows, and consider how these reforms might change their risk exposure. With implementation expected from 2026, early preparation will be critical to navigating the new landscape with confidence and control.