If your startup has a subsidiary abroad, a US parent company, or a co-founder running operations from Lisbon while you're based in London, the UK transfer pricing rules apply the moment money moves between those entities.
Most founders never hear the phrase until an accountant raises it at a funding round, or worse, until HMRC does. Here's what actually matters, and what doesn't, for a startup rather than a multinational.
What Is Transfer Pricing?
Transfer pricing is the requirement that transactions between connected companies, a UK entity and its overseas subsidiary or parent, be priced as if the two were unrelated businesses negotiating at arm's length. That's the whole concept: no discounted management fees to shift profit into a lower-tax jurisdiction, no free-of-charge IP licences between related entities, no informal internal loans at rates nobody outside the group would ever agree to.
The UK transfer pricing rules sit in Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), built on the arm's length principle set out in the OECD's Model Tax Convention.
It's a self-assessment regime, too. HMRC doesn't pre-clear your pricing; you confirm it meets the standard yourself when you file, and if it doesn't, you're expected to adjust your own return. Adjustments only run one way: HMRC can push your UK taxable profit up if it thinks you've shifted profit out, but you can't use transfer pricing to claim a loss the other way. For founders juggling product, hiring, and runway, this is the bit that catches people out. Nobody flags it for you until it's a problem.
The SME Exemption Explained
Most UK startups are still exempt from the UK transfer pricing rules under the SME exemption, and contrary to what a lot of founders have heard, that exemption hasn't been narrowed. HMRC proposed removing it for medium-sized enterprises in an April 2025 consultation, but the government confirmed in its Autumn Budget 2025 decision that medium-sized businesses keep the exemption. The plan to restrict it to small enterprises only was dropped.
The current thresholds, set out in Section 166 TIOPA 2010:
Most seed and Series A startups sit comfortably inside the small-enterprise band, and a fair few Series B companies still land inside "medium." If you're there, the statutory transfer pricing rules generally do not apply because of the SME exemption, meaning formal transfer pricing documentation requirements are usually not expected .
But the exemption has real edges. It doesn't apply if your overseas connected entity sits in a country without a UK double tax treaty, if the transaction touches a Patent Box claim, or if HMRC issues a specific notice pulling you back into scope. A founder with a subsidiary in a non-treaty jurisdiction, however small the group, is not covered that's worth checking against HMRC's treaty list rather than assuming.
One genuinely new obligation is on the way: the International Controlled Transactions Schedule (ICTS), a new annual filing for cross-border related-party transactions, expected from accounting periods starting on or after 1 January 2027, with a proposed £1 million threshold before it applies. SMEs remain exempt from this too but it's a live consultation, not settled law, so it's one to watch rather than act on today.
Arm's-Length Pricing on Intercompany Transactions
Arm's-length pricing means charging your connected overseas entity what an unrelated company would pay for the same goods, service, or loan. HMRC recognises several accepted methods for getting there: the Comparable Uncontrolled Price method, which benchmarks against a genuinely independent transaction; the Resale Price method, working back from resale margin; the Cost Plus method, adding a defensible markup to cost; and the Transactional Net Margin Method, comparing net profit margins across similar arrangements.
For a startup, this rarely means a full transfer pricing study. It means having a documented, logical basis for whatever you're charging a management fee, a software licence, an intercompany loan rate rather than a number picked because it was convenient for this year's tax position. Even where the SME exemption applies and formal documentation isn't legally required, having intra-group agreements in place is sensible practice: they won't count as formal transfer pricing documentation, but they give you something to point to if HMRC ever asks, and they support the pricing policy you're actually running on.
Red Flags HMRC Looks For
HMRC scrutinises transfer pricing arrangements that don't match how the business actually operates on the ground contracts and legal structures divorced from operational reality are treated as high risk. HMRC's Guidelines for Compliance (GfC7), first published in September 2024 and updated again in December 2025, sets out exactly what this looks like in practice: above-market intra-group service fees, cost-based rewards that don't reflect the value actually being created, single flat franchise-style fees, and added most recently offshore procurement arrangements where an overseas entity charges a UK company for sourcing work without the pricing scaling to the value delivered.
The consequence of getting this wrong isn't abstract. Transfer pricing penalties in the UK follow the standard Schedule 24 Finance Act 2007 regime: a careless inaccuracy can draw a penalty of up to 30% of the tax underpaid, rising sharply for deliberate errors.
Separate penalties of up to £3,000 may apply where a taxpayer fails to provide transfer pricing documentation or information when validly requested by HMRC. Poor documentation on its own tends to get treated as "careless" behaviour by default, which is often the difference between no penalty and a real one so even startups relying on the SME exemption have a genuine incentive to keep basic records tidy.
Staying Compliant Without a Big Accountant
Staying compliant without an in-house tax team starts with confirming your exemption status against the current thresholds, then documenting your intercompany pricing logic even if you're not legally required to. Check your group's headcount and turnover against the small and medium thresholds above; check whether every overseas connected entity sits in a treaty country; and write down, briefly, how you decided what to charge for any management fee, loan, or licence between entities.
None of this needs a Big Four engagement; it needs twenty minutes and a document you can find again in eighteen months, and it's the difference between a clean answer and a costly one if the question ever comes from HMRC rather than an investor's diligence team.
If you're planning to scale internationally, keep half an eye on the ICTS timeline. It won't touch you at seed stage, but a founder who's still exempt today and raising a Series C in 2027 should already know the £1 million transaction threshold exists, so it isn't a surprise later. Beyond that, the practical rule under the UK transfer pricing rules is straightforward: price intercompany transactions the way you'd price them with a stranger, write down why, and revisit it whenever the structure changes to a new subsidiary, a new lender, a new licensing arrangement.
FAQs
1. What is transfer pricing?Transfer pricing is the rule that transactions between connected companies, a UK business and its overseas subsidiary, for instance must be priced as if the parties were independent. In the UK it's governed by the UK transfer pricing rules in Part 4 of TIOPA 2010, built on the OECD's arm's length principle, and enforced through self-assessment rather than pre-approval.
2. Does the SME exemption still apply to UK startups?Yes. The government confirmed in its Autumn Budget 2025 decision that medium-sized enterprises keep the SME exemption, reversing an earlier proposal to remove it. Small businesses (50 or fewer employees, turnover or assets under €10 million) and medium ones (250 or fewer employees, turnover under €50 million or assets under €43 million) remain covered, subject to the usual carve-outs for non-treaty territories and Patent Box claims.
3. How do startups stay compliant without a big accounting team?Confirm your exemption status against current thresholds, check any overseas entity that sits in a treaty country, and keep a short written record of how intercompany prices were set. It doesn't need to meet formal documentation standards to be useful, and it's the simplest way to avoid transfer pricing penalties if HMRC ever asks questions later.
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Sources: HMRC's International Manual (INTM412070, INTM412080, INTM450070), TIOPA 2010, HMRC's Guidelines for Compliance (GfC7, September 2024 and December 2025 updates), Deloitte Taxscape's Autumn Budget 2025 measure notes, and reporting from Grant Thornton, BDO, Saffery, KPMG, and Price Bailey. Figures reflect the most recent available guidance at the time of writing.
The EP+ Editorial Desk covers UK startups, founder stories, and venture capital. All editorial content is independently produced and human-reviewed before publication.
