INTM489140 - Unassessed Transfer Pricing Profits Conditions: The Tax Design Condition (TDC)
Source: gov.uk (2025-12-04)


UTPP will apply to accounting periods beginning on or after 1 January 2026. This guidance will be updated with detailed examples by 1 January 2026. For earlier accounting periods please use the diverted profits tax guidance at INTM489500 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm489500)

TIOPA/S217E

In order for unassessed transfer pricing profits to be assessed under UTPP, there must be a tax design.

The TDC gateway is a purposive test which considers whether it is reasonable to assume that there is a design to reduce UK tax. UK tax for UTPP purposes means income tax (withholding tax) and corporation tax.

The TDC is met if it is reasonable to assume that the structure of:
- the transaction or series of transactions by which the provision to which the unassessed transfer pricing profits relate is made or imposed, or
- any arrangements to which the transaction or series of transactions relate,
is designed to have the effect of reducing, eliminating or delaying the liability of any person to pay UK tax.

TDC Considerations

In deciding whether this test is met regard must be had to all the circumstances. The ‘reasonable to assume’ test is different from the main tax purpose or main tax benefits test found in other parts of the corporation tax rules. A transaction may have had a design objective of securing a tax reduction despite also being designed to secure commercial objectives.

It is not intended that UTPP will apply purely because a company decides to take advantage of lower tax rates offered by another territory by means of a wholesale transfer of the economic activity needed to generate the associated income. UTPP seeks to identify where there is a design to separate UK economic activity and the income arising from that activity in order to reduce, eliminate or delay a liability to UK tax. To achieve this aim, the TDC specifies that the tax design must be connected to the unassessed transfer pricing profits.

For example, the legislation may apply where an asset with an existing income stream is transferred by a UK company to an affiliate in a low or no tax territory, if the transfer is designed to justify attribution of profits to that territory despite no, or very nominal, income generation activity being performed in that territory.

For arrangements to be considered to be designed to secure the reduction, elimination or delay of UK tax liability in connection to the unassessed transfer pricing profits, HMRC expects that there will usually be some degree of contrivance. This means that there is some measure of artificiality in the arrangements being tested, or they differ in some material way to those that would have been made if the opportunity to achieve the tax reduction was not a relevant consideration for any party involved at any time.

Gatheringevidence on the TDC

The evidence of the TDC being met is usually very fact specific but HMRC experience suggests some commonalities between cases, including:
- positive evidence of overt tax design from planning documents or emails
- negative evidence such as the absence of quantifiable non-tax benefits arising to the UK party from a payment
- staff numbers, or lack of staff, that do not accord with the value or type of functions attributed to each entity
- if the transaction is materially different from comparable transactions by other parties and the main reason for that difference appears to be to secure a tax advantage
Wider evidence of a customer’s approach to its tax obligations, while indicative of general behaviours, is not evidence of the TDC being met in respect of particular arrangements.

The Insufficient Economic Substance Condition

The TDC is similar to DPT’s insufficient economic substance condition and is intended to have broadly the same scope.

One change is that the insufficient economic substance condition specifically required comparison of the tax benefits and the non-tax benefits of the arrangements. UTPP’s TDC does not explicitly require such a comparison. However, any non-tax benefits are likely to be relevant in determining whether there is a tax design which aims to secure a tax reduction. Extensive evidence of the tax benefits and a lack of similar evidence of non-tax benefits may be an indicator of contrivance and vice versa. If a company can demonstrate that they entered into transactions or structures with the genuine expectation of non-tax benefits but for reasons outside their control these did not materialise, then it is less likely that the TDC is met.

Another change is the tax reduction to which the TDC or insufficient economic substance condition refers. DPT’s insufficient economic substance condition was only met where the design was to secure the tax reduction as defined in the ETMO in FA15/S107(3)(b). For the TDC to be met there must be a link between the tax design and the structure of the transaction, series of transactions, or wider arrangements which give rise to the unassessed transfer pricing profits arising from the provision. Both statutes require a link between a specific provision, which results in a reduction in UK tax and the design to achieve this reduction.