HMRC International Manual Update

HMRC has released a series of targeted but significant updates to its International Manual, ahead of the wider reforms scheduled to take effect from 1 January 2026. While not a wholesale rewrite, these changes provide a clear signal of HMRC’s evolving approach to Transfer Pricing (TP), Permanent Establishments (PEs) and Diverted Profits Tax (DPT), and how these regimes will operate in a more integrated way going forward.

The updates aim to clarify HMRC’s interpretation of the forthcoming legislative changes, improve cross-manual consistency, and prepare taxpayers for a more structured and evidence-driven compliance environment.

• Transfer Pricing: HMRC updated the TP guidance to incorporate new draft content linked from INTM414000. New or expanded sections cover the participation condition, exemptions (including SME treatment and UK-UK transactions), financial transactions, and compensating adjustments.
• Permanent Establishments: Updates include corrections to the treatment of hybrid entity double deduction mismatches and stranded deductions (INTM557080). Guidance for foreign PEs (INTM282080) has been updated, with roll-over relief and depreciating asset guidance moved into the Capital Gains Manual.
• Diverted Profits Tax: HMRC updated INTM489520 to reflect the transition from a standalone DPT regime to the new Unassessed Transfer Pricing Profits (UTPP) mechanism within corporation tax. The guidance now contains in depth explanations complete with examples of how the new UTPP mechanism is applied.

 

Key Risks Areas for Businesses

The key risks that businesses must focus on to ensure compliance with HMRC’s updated guidance are as follows:

• Transfer Pricing Audit Exposure: Transactions may fall outside or inside the TP regime incorrectly if entities are erroneously classified as associated, increasing audit exposure. Year‑end adjustments are also more likely to be challenged if they lack methodology, contemporaneous evidence or proper implementation.
• Accurate Attribution of FAR to PEs: HMRC is placing increased scrutiny on the accurate attribution of functions, assets and risks (FAR). In particular, the incorrect classification of payments involving hybrid entities may lead to disallowed deductions.
• Profit Allocation and Substance: The integration of diverted profit concepts into mainstream TP enquiries raises scrutiny of profit allocation models. HMRC may challenge whether hub or principal entities genuinely control key risks in the event of insufficient evidence of substance, decision‑making and control.

 

Practical Implications – What Should Businesses Be Doing Now?

With the increased scrutiny by HMRC on TP, PEs and DPT, it is essential for companies to adopt proactive measures to ensure their policies are defensible and aligned with HMRC’s updated guidance, such as:

• Intra-Group Financing: Businesses should maintain robust benchmarking and functional analyses for loans, guarantees, and treasury‑related transactions. A formal intra-group financing policy and up‑to‑date corporate structure map reflecting direct, indirect and de facto control relationships should also be kept.
• Documenting Year-End Adjustments: To avoid undue scrutiny from HMRC, companies should consider implementing formal year-end TP adjustment procedures and ensure such adjustments are reflected in legal agreements and intercompany settlement processes. Clear contemporaneous evidence supporting the adjustment should also be maintained.
• PE Compliance and Monitoring: Functional analyses of PEs should be regularly refreshed, with a particular focus on significant people functions. This includes the alignment of risk‑bearing with actual decision‑making and governance. Value chain mapping to evidence the operational footprint is recommended.
• Internal Alignment and Governance: Companies seeking to minimise tax risks should align KPIs, reporting structures and roles with actual functions, as well as narratives on value drivers, risks and functions, as inconsistencies between local files, master file, agreements and internal reporting can suggest diversion of profits.

 

Looking Ahead

These updates reinforce HMRC's move toward a more integrated and assertive international tax framework, ahead of the full introduction of the UTPP regime in 2026. The message is clear: TP, PE and diverted profit issues will no longer be viewed in isolation.

Businesses that act early to refresh documentation, revisit policy positions and strengthen governance will be best placed to manage risk, and to defend their position if challenged.

Contact us if you would like to further discuss this development.