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tool: Step 4 - The catch The medium-sized exemption is much less helpful than the small-sized one. There is a further limitation which seems likely in practice to deny medium-sized taxpayers much of the certainty they might have hoped to gain from qualifying for the exemption. “To further protect revenues”, the Inland Revenue will have the power to withdraw the exemption for medium-sized taxpayers whom they notify. The Inland Revenue will exercise this power retrospectively, after the taxpayer has submitted its tax return. A notice will be issued, requiring the taxpayer to recompute their tax return, increasing their taxable profits where necessary to reflect arm's length transfer prices. The notice may apply to all of the taxpayer’s transactions with related parties, or could relate to specified transactions only. Apparently this power will only be used “where a significant amount of tax is at stake”. The legislation does not define what is a significant amount of tax, and nor does any Inland Revenue guidance give any clear lines in the sand, so we will be at the mercy of individual Inspectors of Tax. Most worryingly, the taxpayer will have only 90 days to submit a revised tax return. Any understatement of tax that remains at that point will be exposed to potential penalties. 90 days is not long to carry out a transfer pricing analysis from scratch. At best, the taxpayer will have to drop other activities and throw resources at the analysis to complete it in 90 days. At worst, it will be nigh-on impossible. So, medium-sized companies still face a realistic risk of transfer pricing adjustment and the possibility of having 90 days to do enough work to avoid penalties. In practice, many UK taxpayers with significant transactions with related parties (in the UK or overseas) may decide they have no choice but to carry out at least some high level analysis of their transfer pricing position, in order to determine their potential exposures. The 'small print' Neither TPS nor its affiliates and employees make any representation regarding the completeness or accuracy thereof and they accept no responsibility for any loss or damage incurred as a result of any user acting or refraining from acting upon anything contained on these pages or upon its omission therefrom. |
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