UK transfer pricing reform 2025: SME rules under review

On 28 April 2025, HMRC launched a 10-week consultation on proposed reforms to the UK’s transfer pricing framework. Among the headline proposals was the removal of the transfer-pricing exemption for medium-sized enterprises (SMEs), narrowing the relief to apply only to “small enterprises”, with updated thresholds. The consultation also proposed the introduction of a new International Controlled Transactions Schedule (ICTS).

Alongside this, HMRC released a companion proposal covering reform of UK transfer pricing law, permanent establishments (PE), and Diverted Profits Tax (DPT). Draft legislation aims to exempt most UK-to-UK transactions, confirming HMRC’s shift to a risk-based model that reduces compliance where UK risk is low, while demanding richer cross-border data to tackle profit diversion.

The consultation formally closed on 7 July 2025, and the government is now considering the responses received. In the meantime, businesses are being encouraged to prepare for change and review how these proposals may affect their compliance position.

Scope of the SME exemption and proposed changes

A medium-sized enterprise is currently defined as one that:

• Employs between 50 and fewer than 250 people.
• Has an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million (but greater than €10 million).
• Is not classified as a micro or small enterprise.

The consultation proposes narrowing the exemption to apply only to micro and small enterprises. Medium-sized businesses previously out of scope, would be expected to comply with full transfer pricing rules, including documentation and reporting obligations.

Refinement of the small enterprise threshold

HMRC also proposes updating the definition of a small enterprise by adjusting the financial thresholds. The turnover and balance sheet ceilings would be increased from €10 million to £10 million, bringing the figures in line with UK standards and reducing the reliance on euro benchmarks.

The employee threshold would remain unchanged at fewer than 50 employees.

This revision supports the government’s intention to clarify which companies qualify for the transfer pricing exemption. As a result, only micro and small enterprises would be excluded from the new reporting obligations, tightening the exemption and expanding the scope of compliance to a broader range of mid-sized UK businesses.

Current UK law and transfer-pricing obligations

In the UK, businesses must keep sufficient records to file accurate tax returns. Companies within the scope of transfer pricing must demonstrate that all related-party transactions are priced in accordance with Part 4 of TIOPA (Taxation (International and Other Provisions) Act 2010).

Very large businesses (within multinational groups exceeding €750 million turnover), who are subject to country-by-country reporting (CbCR), must prepare a Master File and Local File aligned with OECD guidance, and submit these to HMRC upon request.

To find out more about the current transfer pricing rules, including existing SME exemptions and compliance expectations, take a look at our Transfer Pricing for Multinational Enterprises (MNEs) guide.

Introduction of the International Controlled Transactions Schedule (ICTS)

A central component of the reform package is the proposed International Controlled Transactions Schedule (ICTS). This new filing requirement would apply to all UK companies and permanent establishments that do not fall within the small enterprise category, provided their total cross-border related-party transactions exceed £1 million.

The ICTS is designed to help HMRC better identify transfer pricing risk through objective, easily accessible data. The draft ICTS template includes:

1. Aggregated tables of income and expenditure by transaction type, counterparty, and transfer pricing method (de minimis threshold: £100k).
2. Loan data for balances above £5 million or P&L impact over £100k, with adjusted thresholds for country-by-country reporting groups.
3. A set of binary risk indicators to flag high-risk positions.

Notably, the ICTS would exclude UK-to-UK transactions, APA-covered dealings, and exempt dividend flows.

What UK businesses should do next in response to transfer pricing reform

The proposals outlined in HMRC’s consultation represent the most significant overhaul of UK transfer pricing compliance since 2004. The changes signal a move towards a more data-led, risk-based regime that aligns more closely with international expectations on transparency and fair taxation.

For medium-sized businesses, the end of the SME exemption would be a notable shift. Many companies that were previously outside the scope of transfer pricing requirements must now consider whether they meet the proposed documentation thresholds, particularly those operating internationally or with growing intra-group activity. Preparing proactively for the ICTS filing obligation will also be critical, especially for those with cross-border transactions totalling more than £1 million, who may soon find themselves subject to mandatory reporting.

This new compliance landscape will likely increase pressure on internal finance and tax teams to improve the quality, consistency, and audit-readiness of their data. For groups unfamiliar with OECD-aligned documentation, the proposed framework introduces not just a new process, but a new expectation: to demonstrate robust, evidence-based pricing and risk governance across all material related-party dealings.

Get in touch

With the SME exemption potentially disappearing and the introduction of ICTS on the horizon, transfer pricing compliance is fast becoming a priority for many businesses previously unaffected. Whether you’re preparing for inclusion under new thresholds or seeking clarity on cross-border reporting, the time to act is now.

For tailored guidance on your transfer pricing arrangements, or support in anticipating how these changes could impact your organisation, speak to our tax experts today. We’re here to help you navigate the evolving landscape and remain compliant with confidence.

Photo by Yousef Salhamoud on Unsplash