ENGLAND & WALES Law and Practice Contributed by: James Ross, Paolo Palmigiano, Debbie Cloake, Helen Farr, Debbie Heywood and Louise Popple, Winston Taylor
has an interest – ie, an EBITDA ratio that is higher than 30% – the UK companies may make a “group ratio election”, allowing it to claim interest deduc - tions up to an equivalent ratio. Disallowed deduc - tions may be carried forward indefinitely and utilised in future periods; unused allowances with respect to the interest:EBITDA ratio may be carried forward for up to five years, and unused allowances with respect to the worldwide interest expense may be carried for - ward for one year. 5.6 Transfer Pricing The UK has transfer pricing rules that align with – and are to be interpreted in accordance with – the OECD transfer pricing guidelines. These apply to domestic UK-to-UK arrangements, as well as cross-border pro - visions, but the government has recently consulted on introducing an exemption for transactions between UK companies where no UK tax is at stake. An exemption applies where the UK company is dor - mant. In addition, SMEs are exempt from transfer pric - ing rules with respect to transactions with residents of the UK and of territories with which the UK has a full tax treaty. HMRC may issue a transfer pricing notice to “turn on” the transfer pricing rules to a medium-sized enterprise in any circumstances, or to a small enter - prise where a transaction results in profits benefiting from the patent box regime. From 1 January 2026, the Finance Act 2026 intro - duced various reforms to the UK’s transfer pricing, permanent establishment and diverted profits tax (DPT) rules, including an exemption from transfer pric - ing rules for domestic transactions between UK com - panies taxable at the same corporation tax rate and an improvement to the “acting together” rules, to prevent truly arms-length arrangements from being caught by the rules. The government considered bringing medi - um-sized enterprises fully within the ambit of transfer pricing, but decided not to proceed with this proposal. 5.7 Anti-Evasion Rules The UK has numerous anti-avoidance rules, many of which operate to disregard or re-characterise arrange - ments whose main purpose, or one of whose main purposes, is the obtaining of a tax advantage. These include a general anti-abuse rule, which can coun -
teract arrangements giving rise to a tax advantage where they are “abusive” – defined as arrangements that cannot reasonably be regarded as a reasonable course of action in relation to the relevant legislative provisions. The courts have established that legisla - tion must be read purposively and applied to the facts as viewed realistically – principles that have frequently been applied to counteract perceived avoidance. 5.8 Tariffs Since the end of the Brexit transition period on 31 December 2020, the tariff regime in the UK has been governed by the UK Global Tariff (UKGT). The UKGT applies to all countries and all goods imported into the UK, unless the UK has a free trade agreement (FTA) with the country of origin or an exception applies (eg, the goods are imported from certain developing coun - tries). Broadly, the tariff rates under the UKGT follow the EU tariffs, with some exceptions for goods where • the Trade and Cooperation Agreement with the EU – this came into force on 1 May 2021 and removed tariffs from goods traded between the UK and the EU, provided that traders had “self-certified” their compliance with agreed rules of origin (ie, that the goods have originated in either the UK or the EU according to specific criteria); and • the Comprehensive and Progressive Agreement for Trans-Pacific Partnership between the UK and nine countries in the Asia-Pacific region – this allows for tariff elimination and reduction on key sectors (eg, food and agricultural products and goods in digital trade). Some goods are covered by a tariff-rate quota (TRQ), which allows a limited amount of a product to be imported at a lower or zero tariff rate, subject to cer - tain qualifying criteria. TRQs primarily cover agricul - tural and fishery products, as well as processed foods and industrial goods. the UK has no domestic production. Examples of notable FTAs include: The UK has removed Russia’s Most Favoured Nation status, following its invasion of Ukraine, effectively imposing significantly higher tariffs on Russian goods. Additional duties of 35% are currently imposed on
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