UK Law and Practice Contributed by: Paolo Palmigiano, Rachael Roberts, Helen Farr, Debbie Heywood and Louise Popple, Taylor Wessing LLP
or the two companies are under common con - trol (including control by an individual or part - nership). The effect of group registration is that all supplies to third parties are treated for VAT purposes by the representative member of the group, all supplies between group members are disregarded, and all group members are jointly and severally liable for the group’s VAT liabilities. 5.5 Thin Capitalisation Rules and Other Limitations The UK polices thin capitalisation through trans - fer-pricing legislation. Interest expense in excess of an arm’s length amount may be disallowed for tax purposes. The transfer pricing legislation provides that it should be read in line with the 2022 OECD Transfer Pricing Guidelines, which include the guidance on financial transactions approved in 2020. The capacity of companies within a group to bear interest expense is gen - erally tested on a company-by-company basis, but, to the extent that a debtor company is unable to do so, other group companies can be treated as guarantors and, as such, may take interest deductions for such interest expense. HMRC will consider entering advance thin-capi - talisation agreements to provide certainty as to a company’s interest deductibility position – these have statutory force as advance pricing agree - ments. In addition, the UK has introduced a corporate interest restriction limiting interest deductions for UK group companies to the lower of 30% of tax EBITDA and the worldwide group’s interest expense, subject to a GBP2 million de minimis. Where the worldwide group 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 deductions up to an equivalent ratio. Disallowed deductions 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 forward 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 provisions, but the govern - ment has recently consulted on introducing an exemption for transactions between UK compa - nies where no UK tax is at stake. An exemption applies where the UK company is dormant. In addition, SMEs are exempt from transfer pricing rules with respect to transactions with residents of the UK and of territories with which the UK has a full tax treaty. HM Revenue & Customs (HMRC) may, however, issue a transfer pricing notice to “turn on” the transfer pricing rules to a medium-sized enterprise in any cir - cumstances, or to a small enterprise where a transaction results in profits benefiting from the patent box regime. On 28 April 2025, the UK Government opened a consultation on draft legislation reforming the UK’s transfer pricing, permanent establishment and diverted profits tax (DPT) rules. Proposals include an exemption from transfer pricing rules for domestic transactions between UK compa - nies 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. In addition, the gov - ernment is proposing to bring medium-sized enterprises fully within the ambit of transfer pricing.
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