New HMRC Guidance: What the High Value on UK Employees Means to You

Life sciences companies headquartered in the United States (U.S.) often find that the United Kingdom (U.K.) and European Union (EU) offer new opportunities. These regions provide favorable regulatory environments for the development of clinical data, mature commercial markets for product offerings and access to highly skilled talent. Expansion into these markets also brings new compliance challenges, including transfer pricing. Companies may be unaware that their current transfer pricing policies may subject them to tax risks based on the new His Majesty’s Revenue and Customs (HMRC) guidance. Multinational companies employing U.K.-based personnel with global or regional responsibilities must evaluate how this impacts their existing transfer pricing policies.

The New HMRC Guidelines: What You Need to Know

On September 10, 2024, HMRC issued Guidelines for Compliance (U.K. GfC) for managing transfer pricing compliance and risks for U.K. businesses. HMRC views “above market intra-group services” as a compliance risk. Specifically, HMRC anticipates that many U.K.-based personnel are performing above market activities. These activities include performing Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) functions, controlling economically significant risk-taking activities or overseeing strategic activities that influence key value drivers for the multinational organization.

Compliance Risks and Challenges

Business leaders need to be aware of HMRC’s increased audit focus on transfer pricing issues aligning with the newly issued compliance guidance. Companies hiring U.K. talent in global or regional roles, such as Chief Revenue Officer or Director of Global Research and Development, may be considered “above market intra-group services.” These types of strategic roles may lead to transfer pricing-related tax exposure in the U.K. Section 3.3, Part 3: Indicators of Transfer Pricing Policy Design Risk, of the U.K.-GfC outlines HMRC’s expectations for transfer pricing policy design. It provides guidelines for best practices to reduce compliance risk for “above market intragroup services” and explains when “above market intragroup services” may require a profit markup in excess of an existing transfer pricing policy established for more routine or local market-facing services. Tax adjustments from HMRC can lead to double taxation on additional income and potential penalties.

Best Practices and Mitigation Strategies

To mitigate exposure to potential double taxation and penalties, companies need to review and design U.K. transfer pricing policies carefully. This should be based on a thorough functional analysis that accurately reflects the group’s facts and circumstances and the value of any “above market intra-group services” provided by U.K. operations.

It’s critical for multinational life sciences companies expanding into or operating in the U.K. to understand transfer pricing policies and the HMRC guidance. We’re here to help you to reduce the risk of noncompliance, to avoid costly audits and to ensure your company is appropriately incorporating the guidance. Contact us and learn more.

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