HMRC Audit - Why transfer pricing matters

A UK-headquartered group with operations in the UAE approached us following a formal enquiry by HMRC. The group had been operating internationally for some time but had not prioritised formal transfer pricing policies or intercompany documentation. While the UAE entity delivered real services and held operational value, the cross-border transactions were loosely defined and unsubstantiated.

The enquiry quickly exposed the lack of a transfer pricing framework and prompted a deeper investigation into how profits were allocated across the group.

The Challenge

When HMRC initiates an enquiry into international transactions, the first request is almost always for transfer pricing documentation and intercompany agreements. In this case, the client had:

• Absence of signed intercompany agreements
• Lack of benchmarking or pricing model to justify internal charges
• Cross-border invoices with no supporting rationale
• Profits being retained in the UAE without a clear economic justification

This placed the group at risk of:

• A transfer pricing adjustment, forcing profits back into the UK tax net
• Exposure to the Diverted Profits Tax regime, which targets artificially structured arrangements
• Penalties for lack of reasonable care and failure to maintain documentation
• A breakdown in tax treaty protection due to perceived lack of substance

The Solution

We were engaged to manage the HMRC audit while building the group’s transfer pricing compliance from the ground up.

1. Urgent Transfer Pricing Review

• We conducted a retrospective review of intercompany transactions over the past three years
• A functional analysis was performed to identify value-driving activities in both the UK and UAE
• Comparable arm’s length pricing benchmarks were sourced to validate existing charges

2. Intercompany Agreements and Documentation

• Formal intercompany agreements were drafted to reflect the services being provided and the commercial logic for internal charges
• Agreements were supported by operational data, including team roles, project flows and internal resource allocations
• A group-wide transfer pricing policy was prepared and submitted as part of the HMRC response

3. HMRC Response and Mitigation

• We engaged directly with HMRC, explaining the group’s commercial structure and how it aligned with OECD principles
• By demonstrating the substance of the UAE entity and the economic justification for profit allocation, we avoided any challenge under the Diverted Profits  Tax Regime
• HMRC accepted the documentation and closed the enquiry with no penalties or adjustments

4. Ongoing Transfer Pricing Compliance

• The client’s Transfer Pricing policy is now reviewed annually in line with financial performance and regulatory updates
• Intercompany transactions are now tracked and priced consistently using pre-agreed methodologies
• The group has implemented a compliance calendar to ensure all local file and master file obligations are met

Results and Benefits

1. The HMRC enquiry was resolved with no tax adjustments or financial penalties
2. The group now has a robust transfer pricing policy backed by formal documentation and defensible commercial rationale
3. All intercompany charges are now audit-ready and compliant with both UK and UAE tax laws
4. The UAE entity’s substance has been validated, protecting its low-tax position under treaty law
5. Tax risk has been reduced significantly across the group, with clear internal controls and ongoing advisory in place

Why Transfer Pricing Matters

Transfer pricing is not just a paperwork exercise. It is the foundation for how profits are allocated across jurisdictions. Without it, businesses risk:

• HMRC or FTA recharacterising internal charges as artificial or excessive
• Double taxation where two countries claim the same income
• Penalties for failing to take reasonable care, even if the structure is commercially sound
• Loss of treaty protection, especially when substance cannot be demonstrated

In today’s environment, any business operating between the UK and the UAE must be prepared to explain how internal pricing works, why it is fair and how it reflects real economic activity.

Takeaway

This case is a clear example of why transfer pricing and intercompany documentation should never be an afterthought. It is the single most important tool to protect your profits from double taxation and defend your position in any audit. Whether your UAE entity is delivering real services or acting as a cost centre, formalising these arrangements is not just good governance—it is a critical tax defence.

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