INTM450104 - Transfer pricing records: materiality of a category of controlled transactions
Source: gov.uk (2025-11-13)


Annex II to Chapter V refers to material categories of controlled transactions should be included in the Local File.

This guidance articulates HMRC’s general view on the interpretation of “material”. However, it is for entities to assess whether, in their view, the value of a given category of controlled transactions is material, and therefore whether it should be included in the Local File.

In order to determine whether a category of controlled transactions is material, it is necessary to consider a variety of factors relating to both the nature and the value of the transactions, in the context of the entity’s business.

Transactions which are material by nature

In HMRC’s view, the following categories of transactions considered to be material due to their nature and complexity:
- transactions priced using a profit split methodology
- transactions concerning the transfer or licence of intangible assets
- transactions concerning Hard to Value Intangibles
- transactions concerning the transfer, use, or right to use key or strategic assets that are required for the entity to carry on its business
- transactions concerning global or regional strategic or leadership services
- transactions concerning Cost Sharing Agreements or Cost Contribution Agreements
- transactions concerning business reorganisations, including where functions, assets or risks have been moved into or out of the UK during the relevant period
For other categories of transactions, entities should make their own determination of what is considered material, taking into account all the relevant facts and circumstances. It is important that entities set out their chosen approach to materiality in the Local File. The Local File is an entity-based document and as such materiality should be viewed from the perspective of the UK entity preparing the Local File rather than the MNE group as a whole. It should not be assumed that the materiality threshold used for the audit of financial statements, which can be set at a very high level for large businesses, is an appropriate standard for determining materiality for the purposes of the Local File.

Aggregation and the de minimis

To determine the materiality of a category of controlled transactions for a UK entity, all the transactions within the category must be aggregated. It is the aggregated position that is used to assess the materiality of the category as a whole. Where a category of controlled transactions consists of a single controlled transaction, only that transaction should be taken into account when assessing the materiality of the category.

HMRC considers that a de minimis threshold of £1 million can be applied to each category of transactions. Transactions with an aggregate impact of no more than £1 million on UK taxable profits and losses, calculated in accordance with Part 4 TIOPA 2010, do not need to be reported in the Local File (provided they are not inherently material as above).

HMRC considers the de minimis to be exceeded where the impact of the transactions on profits or losses at arm’s length is greater than £1 million.

For certain transactions, impacts on profits and losses may arise from matters other than the price of the transactions. For example, this can apply to financial transactions such as derivative contracts or loan relationships giving rise to foreign exchange gains and losses. For such transactions, the question is whether the transactions in aggregate have an impact on profits or losses in excess of £1 million (see example 6 below).

Where a single category includes items of both income and expenditure, the amount used to assess the materiality of the category should be the aggregate absolute amount of each item, regardless of whether positive (increasing profits) or negative (increasing losses). This is illustrated further by examples 4 and 6 below.

Other materiality considerations

The de minimis is intended to operate as a safe harbour, for transactions which are not inherently material (based on the list of inherently material transactions above).

For categories of transactions above the de minimis threshold, materiality should be considered on a case by case basis taking into account all the relevant facts. It is not possible to set out a singular rule for what constitutes a material category of controlled transaction due to the variety of business and transaction types that may need to be reflected within a Local File.

Factors to consider when determining whether a category of controlled transactions that exceeds the de minimis threshold is material can include the following:
- size of the UK entity
- nature of the transaction – consideration of whether a different materiality approach or threshold should be taken for different categories of controlled transactions
- level of risk relating to the category of controlled transactions
- impact of the transaction on the UK entity’s profit or loss position
- industry of the MNE group and UK entity
This list is not exhaustive, and care should be taken to select the appropriate materiality criteria for each UK entity.

Any transactions that are excluded from the Local File either because they fall below the de minimis threshold or because they are deemed to not be material for other reasons must still be priced in accordance with the arm’s length principle.

The above is designed to assist entities when considering the application of Annex II to Chapter V, but it cannot provide exhaustive instruction for all possible transactions and circumstances. HMRC expects entities to adopt an approach which is prudent and proportionate to the risk involved.

Examples

Example 1:

A UK entity provides intra-group IT services to a connected company in Country A. This is a single category which includes multiple transactions (see INTM450101 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm450101)). The total aggregate value of the arm’s length return received for the services in this category is £800,000. As this category does not exceed the £1 million de minimis threshold, details of this category do not need to be reported in the Local File.

If one of the transactions,or the transactions in aggregate included in this category, increased to £1.2 million, the de minimis would be exceeded. Consideration would therefore need to be given to whether, based on the facts and circumstances, the category as a whole is material. If so, all the transactions within the category would need to be included.

Example 2:

A UK entity typically applies a threshold based on a percentage of its turnover when considering materiality. However, the UK entity licences out intangible assets that it developed and owns for use by connected companies in other jurisdictions. As this is considered a material category of transaction, the entity includes full details in its UK Local File regardless of the value of the transaction.

Example 3:

A UK entity has performed contract manufacturing for a connected company in Country B for many years, as well as limited risk distribution for a different connected company in Country B. The contract manufacturing is a legacy function and relates solely to a specific product line which represents a very small percentage of the UK entity’s profit before tax, therefore it has previously been considered as not material under the UK entity’s approach. The UK entity only includes details regarding its distribution functions in the Local File.

During the relevant accounting period, the UK entity ceases to perform this contract manufacturing and the activity is moved to another connected company in Country C. The UK entity begins a new manufacturing operation on behalf of Country B. As this represents a business reorganisation, the UK entity includes details of these transactions in its Local File regardless of the value of the transaction.

Example 4:

A UK entity provides services to a connected company in Country A and receives income of £50 million for providing those services. The same entity receives services from a different connected company in Country B and pays a £50 million fee for the services provided. The two sets of services are priced identically, using the same transfer pricing methodology and comparables. The entity reviews the two sets of services, and concludes that the economically relevant characteristics are materially the same. Both sets may therefore be included within a single category (INTM450102 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm450102)).

The value to use when determining whether or not the category is material is £100 million, i.e. the sum of the price of the transactions within the category. Income and expense items should not be netted off against one another (in this case that would result in the value of the category being nil, and the category being considered to be immaterial, which HMRC does not agree with as the transactions themselves have significant value).

Example 5:

A UK entity provides HR services to a connected company in Country A. This is a single category of transactions. The amount received for the services is £800,000. However, following a transfer pricing analysis, the group considers that the arm’s length value of the services is £1.2 million.

The amount received for the services is below the £1 million de minimis. However, the arm’s length impact on profits and losses (£1.2 million), which determines the entity’s profits and losses in this context, is not. Therefore, the de minimis is exceeded and consideration will need to be given as to whether, based on the facts and circumstances, the transaction is material. If so, details of the services will need to be included in the Local File.

Example 6:

A UK entity (with a GBP functional currency) borrows EUR 10 million from a connected company in Country A. The EUR:GBP exchange rate is 0.85 at the beginning of the period, and 0.8 at the end of the period. The interest rate is 7%. Assume both the principal amount and the interest rate are arm’s length. The entity has no other borrowing.

In the period, assume an exchange gain of £0.5 million arises due to the GBP value of the loan principal of EUR 10 million falling from £8.5 million to £8 million. Assume the interest charge for the period, translated to GBP, is £0.56m (EUR 0.7m).

The arm’s length loan therefore gives rise to an interest expense of £0.56m, and an exchange gain of £0.5m. The total aggregate impact on profits and losses at arm’s length is therefore £1.06m (£0.56m + £0.5m).

The de minimis of £1 million is breached, and consideration would therefore need to be given to whether, based on the facts and circumstances, the loan is material. If so, the loan would need to be included.