Transfer Pricing - SMEs

Transfer Pricing - SMEs

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The situation

The customer owns two companies.
(He owns 100% of shares in both).

One company made a profit. The other a loss.

Can he bill services from one company to the other to cancel out the profits, and avoid corporation tax charges?

Details:

Company 1 made a profit of about £20k
Company 2 made a loss of about £20k

Turnover:
Company 1 turnover £1.5m pa. Company 2 turnover £500k pa

Is transfer pricing legal because these are 'Small' enterprises?

Transfer pricing, ie, one company charging the other for goods or services, needs to carried out at the market rate ('arms length') for large companies.

The law extending this ruling to cover UK transactions is the Finance Act 2004, but there seems to be an exemption for SMEs.
The basic law is ITCA 1988 with various updates.

Am I reading this correctly, if anyone knows!

It would appear, that in this case, the two companies can legally cross-bill.
FA 2004, Chap 2, part 31, section (4) '5B Exemption for small or medium-sized enterprises'.

Thank you in advance

Peterg
Berko
Peter Grimshaw

Replies (4)

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By AnonymousUser
19th Dec 2006 16:21

No expert but...
...no matter what you bill across you better be ready to justify it with the Revenue. Many's the time I have seen "Management charges" from a company who have no staff for instance purely to do this sort of thing. And these days the Revenue seem to find it easier to pick up on than ever.

On transfer pricing (the part I'm not sure of) is the legislation not there to ensure you hold certain paperwork in relation to transactions that are caught, and small/medium companies are exempt? WOuld love to hear someone else's input on this.

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By Paul Soper
21st Dec 2006 03:24

Sorry Peter
Your understanding is wrong - look at Sched 28AA as amended by FA2004 para 5B - exemptionfor small or medium sized enterprises.

The exemption from penalty for failure to have transfer pricing records was for all companies, not just small and medium - but only until March this year.

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By Paul Soper
19th Dec 2006 19:20

SME's Transfer Pricing
Small Entities (turnover or balance sheet totals below 10m euros and in either case less thn 50 employees) are exempt from all transfer pricing issues in the UK and from overseas pricing issues with parties in the EEA and other countries if there is a non-discrimination clause in the DTA.

Medium sized entities (50m and 43m euros and 250 employees (from memory)) are normally exempt unless revenue believe there is avoidance activity where they retain the right to determine liability.

If a small company is linked to a large company - eg common director - and the transfer pricing adjustment to the big company increases its profits the smaller company can, by not claiming the benefit of the exemption make the corresponding adjustment and reduce its profit.

However the problem here, as already identified in an earlier post is the deductability of the management charge in the hands of the paying company - a far more fundamental problem which has nothing to do with transfer pricing at all.

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By Peter Cane
20th Dec 2006 15:17

Exemption
My understanding is that small or medium enterprises are only exempt in so far as keeping transfer pricing documentation is concerned.

The Revenue can still challenge any transfer pricing adjustment , and additional tax may still be due.

The exemption merely protects the company from a penalty in such circumstances.

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