UK Transfer Pricing Rules

The UK transfer pricing rules are becoming harder to manage for groups that hold, develop, fund, license or exploit intellectual property across borders. The practical issue is no longer just whether a legal agreement exists. HMRC and other tax authorities increasingly look at where value is created, who controls risk, who funds development, and whether the profit follows those facts. For IP-rich groups, 2026 should be treated as a year to make the transfer pricing story evidence-led, consistent and ready for review.

Many modern transfer pricing disputes are really about IP, including software, data, brands, product design, know-how and the people behind them. The three recurring 2025 themes are DEMPE analysis, the boundary between routine distribution and intangible-related returns, and the UK’s movement towards more standardised transfer pricing data.

Why UK transfer pricing rules matter for IP-rich groups

Strong highlights

• The UK transfer pricing rules apply the arm’s length principle to transactions between connected parties.
• IP arrangements can create tax risk where legal ownership and economic activity do not match.
• HMRC scrutiny is more likely where royalties, development costs, data, software or brand value move across borders.

HMRC explains that UK transfer pricing rules set out how transactions between connected parties are priced for tax purposes, including transactions between companies in the same group. The rules are intended to ensure that the UK taxes its share of profits in line with the arm’s length principle.

For IP-rich businesses, this means we should look beyond the contract and ask whether the commercial facts support the pricing. A UK company may pay a royalty to an overseas group company, charge another entity for R&D services, contribute to a cost-sharing arrangement, or sell products with embedded technology or brand value. Each flow needs a clear explanation.

A simple licence agreement is not enough if the UK team actually controls the product roadmap, makes key technical decisions, protects the brand, manages valuable data or bears material commercial risk. Equally, a UK IP owner may need evidence that it has the people, decision-making authority, funding capacity and governance needed to support the return it earns.

For UK or UAE matters, WellTax can help assess how these transfer pricing principles apply to real intercompany flows, especially where IP, cross-border expansion and corporate tax reporting overlap.

What 2025 taught us about DEMPE and economic ownership

Strong highlights

• DEMPE should be mapped to evidence, not only to a management chart.
• Legal ownership of IP does not automatically justify all IP-related profit.
• Decision-making, funding and risk control should be visible in records.

The OECD transfer pricing framework treats intangibles as an area requiring special analysis, including the conditions for transactions involving the use or transfer of intangibles. The practical question is who performs and controls the development, enhancement, maintenance, protection and exploitation of the intangible, often shortened to DEMPE.

A UK group should therefore prepare a factual DEMPE map. This should not be a presentation produced only for tax files. It should connect to board papers, project approvals, R&D budgets, hiring plans, product roadmaps, brand strategy, software release decisions and risk registers.

A useful DEMPE review should cover:

1. Which entity legally owns the IP.
2. Which people develop or improve it.
3. Who approves key technical, commercial and funding decisions.
4. Who protects it through registrations, contracts and enforcement.
5. Who exploits it through sales, licensing, data strategy or market access.
6. Who has the financial capacity to bear downside risk.

Where the answer is split across jurisdictions, a one-sided royalty model may not always reflect the commercial position. Depending on the facts, profit split analysis, revised service pricing, updated royalty benchmarking or a change to the operating model may need to be considered.

How UK transfer pricing rules affect royalties and IP licences

Strong highlights

• Royalty rates should be supported by current benchmarking or valuation logic.
• Licence terms should match how the IP is actually used.
• Historic royalty policies may become weak if the business model has changed.

Under the UK transfer pricing rules, royalties and licence fees between connected parties should reflect what independent parties would have agreed in comparable circumstances. That is easier to say than to prove, particularly where the IP is unique, fast-growing, data-led or hard to benchmark.

A royalty policy that was prepared several years ago may no longer fit if the business has changed. For example, a software platform may have moved from a UK-led development model to a multi-country engineering model. A brand may have gained value because local market teams built customer loyalty. A distributor may have moved from simple resale activity to managing local marketing strategy and customer data.

Area to review	Practical question	Evidence to collect
IP ownership	Does legal ownership match value creation?	IP register, contracts, board approvals
Royalty pricing	Is the royalty rate still supportable?	Benchmarking, valuation notes, comparable licences
R&D services	Are development activities priced correctly?	Project records, staff roles, cost base, mark-up support
Risk control	Who can approve, pause or redirect spending?	Budgets, authority matrices, meeting minutes
Local intangibles	Has a distributor created valuable local assets?	Marketing plans, customer data policies, brand strategy

This table should be treated as a starting point. The strongest transfer pricing file is usually the one that reconciles the tax analysis with the commercial documents already used to run the business.

For further reading on the wider UK and UAE position, see WellTax’s guide to UK and UAE transfer pricing rules.

Routine distribution, Amount B and the IP boundary

Strong highlights

• Routine distribution analysis should not ignore local intangible creation.
• Amount B may standardise some baseline distribution returns, subject to local adoption.
• Businesses should check whether limited-risk labels still match the facts.

The OECD describes Amount B as a simplified and streamlined approach for applying the arm’s length principle to in-country baseline marketing and distribution activities. It has been incorporated into the OECD Transfer Pricing Guidelines.

This matters for IP-heavy groups because it puts more pressure on the boundary between routine and non-routine activity. A distributor may be described as limited-risk, but the facts may show something different. It may control local marketing strategy, build a customer database, influence product features, create valuable market insight, or take decisions that affect brand value.

Before relying on a routine distribution return, businesses should review whether:

1. Local teams control strategic marketing decisions.
2. Customer data is collected, analysed and monetised locally.
3. Local management can materially affect pricing or product positioning.
4. The distributor performs activities linked to brand enhancement.
5. The transfer pricing method still fits the functional profile.

If the answer to several of these questions is yes, the entity may not be as routine as the policy suggests. That does not automatically mean the structure is wrong, but it does mean the pricing and documentation need to be reviewed.

UK transfer pricing rules and data-led compliance from 2026

Strong highlights

• The UK is moving towards more structured reporting of cross-border related-party transactions.
• HMRC has confirmed that the International Controlled Transactions Schedule is expected for accounting periods beginning on or after 1 January 2027.
• Groups should prepare transaction data before reporting becomes mandatory.

The government’s transfer pricing scope and documentation response confirms that primary legislation for the International Controlled Transactions Schedule, or ICTS, will be included in Finance Bill 2025 to 2026, with changes expected to apply for accounting periods beginning on or after 1 January 2027.

The same response states that information provided on an ICTS would help HMRC with automated, data-led risk assessment and more accurate identification of transfer pricing risk. This is a significant practical point. If intercompany flows are not well mapped, reporting may expose inconsistencies that were previously hidden in accounting detail.

Businesses should build a single source of truth for:

1. Royalties and licence fees.
2. R&D services and cost contribution arrangements.
3. Management and support services.
4. Intercompany financing.
5. Product flows involving embedded IP.
6. IP transfers and business reorganisations.
7. Permanent establishment-related dealings.

HMRC’s 2024 to 2025 transfer pricing and Diverted Profits Tax statistics show transfer pricing yield of £3,387 million for that year, a marked increase from £1,786 million in 2023 to 2024. This does not mean every group will face an enquiry, but it does show why evidence, governance and consistency matter.

The UK’s wider reform programme also includes simplification measures covering intangibles, UK-to-UK transfer pricing, financial transactions and interpretation in accordance with OECD principles. It also introduces a new charging provision for unassessed transfer pricing profits within Corporation Tax as part of the repeal of Diverted Profits Tax.

For additional context on these reforms, see WellTax’s article on UK tax changes 2026 for transfer pricing, permanent establishment and Diverted Profits Tax.

Practical 2026 checklist for IP and transfer pricing

Strong highlights

• Fix the evidence before HMRC asks for it.
• Align contracts, conduct, pricing and reporting.
• Treat transfer pricing documentation as a risk control tool, not only a filing exercise.

A practical 2026 review should focus on the points most likely to create enquiry risk. The aim is not to produce longer documents. The aim is to make the transfer pricing position easier to explain, easier to evidence and harder to misunderstand.

Use this checklist to:

1. Prepare an updated IP register covering legal ownership, users and relevant jurisdictions.
2. Map DEMPE activity to actual people, budgets and decision records.
3. Review all royalties, R&D charges, cost-sharing arrangements and platform fees.
4. Check that intercompany agreements match real conduct.
5. Refresh benchmarking where the business model, IP value or market conditions have changed.
6. Test whether distributors are genuinely routine.
7. Identify whether local teams create or enhance valuable intangibles.
8. Build transaction-level data for future ICTS reporting.
9. Review UK permanent establishment and Corporation Tax implications where IP or decision-makers move across borders.
10. Keep a short, practical file explaining why the transfer pricing method fits the facts.

Where IP has been migrated, centralised or transferred, valuation support is especially important. A transfer should be assessed by reference to what independent parties would have agreed at the time, based on the information reasonably available then. Fast-growth software, data assets and brands can be particularly difficult because value may change quickly.

For groups operating between the UK and the UAE, WellTax supports international tax advice where UK and UAE considerations, transfer pricing analysis and cross-border structuring are relevant. The key is to make sure the tax position follows the commercial reality, rather than relying on labels that no longer describe the business.

Written by Luca Marin, Partner & Chartered Accountant in the UK, WellTax.