The Finance Act 2026 introduces a new exemption from the requirement to apply the transfer pricing rules to qualifying UK-UK transactions.
The aim of the exemption is to reduce the tax compliance burden, where the application of UK-UK transfer pricing results in a tax neutral position.
For transactions to qualify for this exemption, several conditions must be satisfied. For example, both parties must be chargeable to corporation tax at the same rate, have the same reference currency, and must be UK resident.
However, the above exemption does not apply if either party is an ”excluded company”. An excluded company includes a company which carries on a ring fence trade, or a company which has previously carried on a ring fence trade and has incurred decommissioning expenditure in the post cessation period. This is irrespective of whether the provision itself falls outside the ring fence.
Comment; This simplification is to be welcomed and largely restores the position that existed prior to the changes made to the UK transfer pricing rules to ensure that UK domestic law was consistent with the Treaty of Rome.
The exemption will be of little use to companies operating within the ring fence. The application of the transfer pricing rules to UK-UK transactions can present a particular challenge to a ring fence company within a group. For example, where a company has non ring fence income, such as interest income, and ring fence losses, for example due to decommissioning costs, the restrictions in the loss offset rules can lead to tax inefficiencies. In these circumstances it would be helpful if the ring fence company was not obliged to impute interest on monies held on deposit with a connected company.
If readers would like to discuss the above changes please contact Samantha Rawlings samantha.rawlings@cwenergy.co.uk or their normal CWE contact.