The government has published draft legislation for consultation that makes changes to the following areas.

Transfer pricing. The draft legislation is intended to bring the rules into line with international standards, make it easier for businesses to comply and to tighten the application of the legislation in some circumstances. The changes include:

• Introducing a general exemption from transfer pricing between UK companies where there is no risk of tax loss, subject to exclusions. Taxpayers will be able to elect to apply transfer pricing should they wish to do so.
• Widening the participation condition to ensure that all transactions that should be subject to transfer pricing are caught by the rules.   
• Simplifying the interaction with the intangible fixed assets rules by moving to a single valuation standard. For example, the arm’s length price will be used for cross-border transactions between related parties that are in scope of the transfer pricing rules.  
• Aligning the UK rules for guarantees more closely with the OECD’s model tax convention and transfer pricing guidelines. 

Permanent establishment. The definition of “permanent establishment” and the rules dealing with the attribution of profits to a permanent establishment are being amended to bring the UK’s regime “into line with the latest international consensus”.

Diverted profits tax (DBT). A new corporation tax charging provision for unassessed transfer pricing profits (UTPP) will replace the DBT regime. The government says this will “clarify the relationship between the taxation of diverted profits and transfer pricing, as well as providing clearer access to treaty benefits”. 

The publication of draft legislation follows a policy consultation in summer 2023. 

In addition to the above technical consultation, the government is seeking views on the following proposals:

• Removing the transfer pricing exemption for medium-sized enterprises now that the UK-UK transfer pricing rules are to be largely repealed (see above). 
• Amending the exemption for small enterprises so that the rules “remain fit for purpose and are clear and easy to apply”. The changes include aligning the definition of “enterprise” with that used in the participation exemption.
• Introducing a requirement for in-scope businesses to file an international controlled transaction schedule (ICTS) to report information about certain cross-border, related party transactions to HMRC. The government says that the filing requirement would be “broadly aligned” with similar requirements in other major economies and “designed to not introduce undue additional administrative burden”. The consultation covers the scope, contents and design of the ICTS.

Both consultations were published as part of the government’s tax administration and simplification update which was delivered on 28 April 2025. The consultations will run to 7 July 2025. If you have any feedback that you would like ICAEW to consider for inclusion in its responses, please contact Angela Clegg by 9 June 2025.