Transfer Pricing Comes to Medium-Sized Enterprises – Here’s What Changes

Transfer Pricing Comes to Medium-Sized Enterprises – Here’s What Changes

Big changes are on the horizon for medium-sized UK enterprises as HMRC has announced the removal of the longstanding transfer pricing exemption for these businesses. Until now, only large entities were subject to the UK’s extensive transfer pricing regime, meaning smaller groups could often assess their intercompany arrangements at a lower administrative and cost burden. That’s all set to shift, ushering in fresh compliance demands. And greater scrutiny from both tax authorities and the business world at large.

Unpacking the Redefined Exemption Scope

Currently, medium-sized enterprises (typically with fewer than 250 employees and turnover/balance sheet totals not exceeding set thresholds) have generally been exempt from the full rigors of the UK’s transfer pricing documentation obligations. The rationale was proportionality: why apply resource-intensive requirements on businesses whose intercompany dealings are relatively modest? However, policy makers have grown increasingly concerned that the exemption created loopholes, especially where cross-border transactions or non-standard business structures are concerned.

From 2025, this landscape changes dramatically. Medium-sized groups will fall directly under the same transfer pricing expectations as large groups. The definition of a small enterprise will also be reconsidered, meaning even some currently-exempt small businesses may be required to comply. Exemptions tied to UK-UK transactions and non-qualifying territories will become stricter. For many, this will mean compulsory documentation and a requirement to adhere to arm’s length pricing principles for intercompany transactions. Regardless of the size of deal or the counterparty’s location.

Now is the time for affected businesses to take stock. No one wants to be caught out by the new regime, especially as HMRC is ramping up guidance, compliance checks, and enforcement.

Your New Responsibilities: Documentation & Intercompany Pricing

Previously, only the largest multinational groups needed to prepare extensive transfer pricing files, including local files, master files, and detailed justifications of transfer price calculations. With the reforms, medium-sized groups will be expected to keep robust transfer pricing documentation, often in line with OECD standards. This means detailed reports not just for tax returns, but also for the day-to-day management of intercompany pricing.

Every intercompany service. Be it management charges, cost sharing, intellectual property licensing, or financing. Must now be priced according to the arm’s length principle. Businesses will need to benchmark prices, substantiate any differences, and monitor their arrangements on an ongoing basis. Failure to comply can open the door to penalties, expensive disputes, and retrospective adjustments.

Sector-Specific Risks Facing Medium-Sized UK Businesses

What does this mean for your sector? Not all industries face the same level of risk or complexity under the new transfer pricing rules. Medium-sized UK technology companies, life sciences, engineering consultancies, and manufacturers with international operations will likely face heightened scrutiny. Sectors where intellectual property, high-value services, or group finance are prevalent are top of HMRC’s watch list.

For business owners and finance leaders, the risks are multi-layered. In manufacturing, discrepancies in raw material pricing or intercompany service mark-ups can create exposure. Tech and life sciences firms are expected to justify royalty rates and R&D cost allocations. Distribution companies might need to substantiate margins for intra-group sales and logistics. Even professional service firms could see regulatory focus where cross-border group recharges are common.

There’s also the operational angle: implementing reliable data processes for benchmarking, applying consistent policies, and managing transfer pricing throughout evolving business models present very real challenges. Transfer pricing is no longer a ‘tick box’ exercise conducted once a year; it requires close coordination between finance, tax, and operational teams.

Steps Accountants Should Take with Affected Clients

With sweeping changes on the doorstep, proactive steps are essential. Accountants and advisers need to review their medium-sized clients’ group structure, cross-border activity, and any intercompany dealings, no matter how routine or minor they may seem. It’s wise to:

• Assess client eligibility against the revised exemption thresholds and prepare for incoming requirements.
• Audit historical intercompany transactions. This may uncover legacy risks or exposures.
• Support the development of compliant transfer pricing documentation, ideally using benchmarking studies and following international best practice.
• Design robust policies for ongoing compliance, putting systems in place for regular monitoring and adjustment of intercompany prices.
• Brief senior management about the changes, as transfer pricing risk now reaches the boardroom.

For some clients, this is also a prime opportunity to integrate digital solutions. Such as advanced finance software. To manage compliance and automate benchmarking processes. Those who act early, leveraging a clear understanding of their sector-specific risks, are likely to reduce audit exposure and compliance costs.

Reflecting on the Shift – Experience, Expertise, and Practical Impact

For accountants who have supported large groups through transfer pricing compliance, many of these practices will feel familiar. In my own consultancy work, helping tech companies and manufacturers with operations in Africa and across Europe, the most successful transitions always involve building a transfer pricing policy that is both practical and defensible. A policy that fits their group’s real activities rather than a generic template gathered off the shelf.

Many medium-sized businesses, though, have never had to think about transfer pricing beyond occasional informal benchmarking. It can come as a shock to find that an arm’s length review is now required for the group’s management fees or for cross-border IP charges. This new framework will require investment in training, process, and sometimes external benchmarking studies to meet HMRC expectations.

The lesson is clear: those who treat transfer pricing as a living, evolving process. Not just once-a-year paperwork. Are best positioned for long-term compliance and minimal disruption. Firms with proactive documentation, strong data management, and up-to-date policies generally have a smoother relationship with tax authorities and are prepared when the compliance spotlight lands on them.

Building trust starts with transparency and engagement not just with HMRC, but within your organization. Between finance, tax advisers, and operational leaders. As these rules bed in, that alignment will be the difference between seamless compliance and the risk of costly, drawn-out disputes.

Frequently Asked Questions

What is the main change for medium-sized enterprises regarding transfer pricing in 2025?

Medium-sized enterprises will no longer be exempt from HMRC transfer pricing rules. They must prepare comprehensive documentation and price intercompany transactions at arm’s length, similar to large groups.

How do I know if my business is affected by the changes?

If your group surpasses the latest thresholds for what HMRC defines as a ‘small’ enterprise. Typically by employee count, turnover, or balance sheet. These rules now apply. Regularly review your business size and group structure to ensure compliance.

What documentation is required under the new rules?

Businesses must prepare transfer pricing files justifying their intercompany pricing. This usually follows OECD standards, with benchmarking analyses and detailed transaction narratives.

What are HMRC’s areas of focus for enforcement?

High-risk sectors include technology, life sciences, engineering, manufacturing, and any area where intellectual property or cross-border finance plays a central role. HMRC will scrutinize documentation, benchmarking quality, and the rationale for intercompany prices.

What steps should accountants take for affected clients?

Start by reviewing each client’s historical intercompany transactions and group structure, educate management, and develop robust policies for regular price reviews. Early adoption of digital tools and proactive compliance processes will mitigate risk.