Finance Bill 2025–26: UK Transfer Pricing Reforms – What Businesses Need to Know

In late 2025, the UK government introduced significant changes to the transfer pricing framework through the Finance (No. 2) Bill 2025–26. These reforms, which are expected to generally apply to accounting periods beginning on or after 1 January 2026 (subject to Royal Assent), seek to modernise core elements of the UK’s transfer pricing rules, improve alignment with international norms and set a legislative foundation for future compliance developments. They also sit alongside related reforms to permanent establishment (PE) rules and the replacement of Diverted Profits Tax (DPT). This article summarises the key proposed legislative changes and their implications for businesses operating in or through the UK.

 

Why the UK Has Updated Its Transfer Pricing Rules?

Historically, the UK transfer pricing regime has been interpreted and applied in ways that could differ from the OECD Transfer Pricing Guidelines, leading to debates over scope, valuation and interaction with other tax rules. The Finance Bill reforms are designed to:

• Modernise the statutory language to better reflect economic substance;
• Reduce technical divergence from international norms;
• Provide clarity on key areas such as related party scope and valuation standards; and
• Integrate transfer pricing more coherently with PE and profit diversion rules.

The overall effect is to shift focus away from formal technicalities toward pricing outcomes that align taxable profits more closely with where value is created.

 

Key Features of the Finance Bill Reforms

1. Scope of Transfer Pricing: UK-UK Transactions

One of the most noticeable changes is the introduction of a domestic exemption for UK-UK related-party transactions that meet specified conditions. This exemption is intended to reduce compliance burdens for groups where domestic transactions do not present a material tax risk.

However, the exemption is not universal. Certain categories of taxpayers and regimes are carved out, including (among others) banks and financial institutions, UK Real Estate Investment Trusts, and transactions interacting with specific regimes such as the Patent Box. In addition, taxpayers may elect out of the exemption, and HMRC retains the power to disapply it where necessary to ensure the correct amount of tax is collected.

As a result, groups will still need to map carefully which UK-UK transactions qualify for the exemption and which remain fully within scope of the UK transfer pricing rules.

2. Clarifying “Participation” and “Acting Together”

The legislation expands and clarifies when parties are treated as connected for transfer pricing purposes, including circumstances where parties are considered to be “acting together” in substance, even if formal ownership thresholds are not met.

While this change is intended to ensure that transfer pricing applies where coordinated influence exists in economic reality, the breadth of the “acting together” concept may give rise to edge cases or unintended consequences in practice. This is particularly relevant for joint ventures, investment fund structures and minority shareholdings with enhanced governance or veto rights.

The practical impact of this change will depend heavily on forthcoming HMRC guidance and how the concept is applied in compliance and enquiry contexts. Businesses should, therefore, identify structures where influence is exercised through governance arrangements rather than ownership alone and ensure that contemporaneous documentation clearly evidences commercial decision-making and the absence (where relevant) of coordinated control.

3. Valuation of Intangible Fixed Assets

Under the reforms, intangible fixed assets (IFAs) transferred between related parties will be valued on an arm’s-length basis, reducing reliance on valuation rules that turned on whether a UK tax advantage was considered to arise.

By adopting a single, arm’s length valuation standard, the reforms simplify the legislation and reinforce alignment with international practice. In practice, this places increased emphasis on robust, well supported economic valuation when IFAs are transferred within a group.

4. Financial Transactions and Implicit Support

The Finance Bill updates the transfer pricing treatment of financial transactions to reflect current OECD thinking, including the concept of implicit group support. Where group companies are seen as likely to support each other financially (even without an explicit guarantee), this expectation should be reflected in arm’s-length pricing.

The legislation also clarifies the treatment of explicit guarantees and credit support, confirming that pricing should reflect any enhancement to borrowing capacity or terms arising from such support.

5. Integration with PE Rules and ICTS Development

The reforms also update the UK’s PE profit attribution regime to reflect international best practice, aligning it more closely with treaty norms. In addition, the Bill creates a legislative foundation for the International Controlled Transaction Schedule (ICTS) - a forthcoming reporting requirement for cross-border related party transactions expected to apply for periods beginning on or after 1 January 2027.

The ICTS is intended to provide HMRC with more granular data to support risk-based compliance and is likely to influence how HMRC selects cases for enquiry.

6. Replacing DPT with UTPP

A notable structural change is the repeal of the standalone Diverted Profits Tax (DPT) and its replacement with a new Unassessed Transfer Pricing Profits (UTPP) charge under mainstream corporation tax.

UTPP targets situations where arm’s-length profits are omitted from assessment and integrates profit diversion concerns more tightly with the transfer pricing framework. This represents a shift away from a separate punitive regime toward a more conventional, but potentially broader, assessment mechanism.

 

Implications for Business and Next Steps

For UK-based and multinational groups, the proposed reforms have several practical implications:

• Some transactions may now be treated as within scope of the UK transfer pricing rules where they were previously considered outside scope.
• Groups should revisit their intercompany pricing policies to assess whether elections around the UK-UK exemption are appropriate.
• Robust economic analysis will be increasingly important - particularly for intangible transfers and financing arrangements.
• Early planning for ICTS reporting is advisable, as it will affect data collection and compliance processes.
• The new UTPP regime changes how profit diversion risk is assessed and may influence future dispute strategy.

These reforms establish the legislative foundation for HMRC’s ongoing compliance and guidance updates. They underscore the importance of clarity, economic substance and defensible pricing positions as HMRC’s transfer pricing enforcement evolves.

 

How DLA Piper Can Help?

Our international tax team can assist in interpreting the Finance Bill reforms, assessing their impact on your existing transfer pricing policies, and preparing for related compliance and reporting requirements. We support clients with policy design, documentation, valuation analysis, risk assessment and interaction with HMRC on transfer pricing matters.