Why HMRC’s expanded compliance facility is changing what international groups must be able to prove.

The request initially appeared routine. The tax team had been asked to update the transfer pricing review of an overseas principal company within an international group, and the structure itself had been in place for several years. The overseas entity legally owned valuable intellectual property, contractually assumed the principal commercial risks and received the residual profit generated by the business, while the UK company employed a substantial proportion of the group’s management and operational workforce and was remunerated on a cost-plus basis.

The documentation appeared, at first sight, to support the model. Intercompany agreements were in place, the benchmarking study remained current, the overseas company had local directors and premises, and the corporate records consistently described it as the group’s entrepreneurial principal. The expectation was therefore that the exercise would confirm the continuing defensibility of the policy, subject perhaps to some technical updating.

The review changed direction when the tax team began to focus less on the legal documentation and more on the decision-making process behind the structure. They asked who had originally decided to develop the intellectual property, who approved the annual investment budget, who determined whether a product should be launched, delayed or abandoned, and who had authority to change strategy when the underlying commercial risks materialised.

They then asked the question that proved decisive: what contemporaneous evidence demonstrated that the overseas company had made those decisions before the UK management team began implementing them?

The answer did not lie in the intercompany agreements or in the board minutes. It lay instead in emails, management papers, investment memoranda, calendar records and the sequence in which decisions had actually been taken. Those records suggested that the commercially significant decisions had been formulated, evaluated and effectively approved in the United Kingdom before being formally ratified overseas.

By the time the review was complete, the group was no longer considering only whether the UK company had received an arm’s length reward. It was also considering whether profits legally recorded overseas had arisen from assets and risks that were, in substance, managed from the United Kingdom.

What had begun as a transfer pricing review had become a CFC review.

Why the timing matters

On 17 June 2026, HMRC updated and expanded its former Profit Diversion Compliance Facility, which is now known as the Transfer Pricing & Profit Diversion Compliance Facility, or TP&PDCF.

The change is considerably more significant than a simple rebranding exercise. The original facility was primarily associated with arrangements that potentially fell within the diverted profits regime, whereas the expanded facility now expressly covers all significant non-financial transfer pricing risks. HMRC is encouraging multinational groups with potentially relevant arrangements to review both the design and the practical implementation of their transfer pricing policies and, where necessary, to submit a fully evidenced proposal dealing with additional tax, interest and penalties.

The practical implication is that the facility is no longer confined to arrangements that would immediately be regarded as highly aggressive or artificial. A group may now need to consider its position where the formal transfer pricing policy appears conventional but does not adequately reflect the functions actually performed by UK personnel, the location in which commercial risks are controlled, the contribution made by UK management to valuable intangible assets, or the difference between contractual authority and genuine decision-making.

HMRC’s position is that a group which is confident that its transfer pricing is correct, and that it is paying the appropriate amount of UK Corporation Tax, should not need to use the facility. The real difficulty, however, lies in establishing whether that confidence is supported by evidence that extends beyond agreements, benchmarking and formal governance records.

The revised HMRC evidence pack is particularly revealing

The expanded facility includes a series of annexes setting out the information HMRC expects a group to assemble when reviewing its transfer pricing position. These include an evidence log, an analysis of the UK profit and loss account by transfer pricing policy, a staff profile and a revenue and cost profile for relevant overseas entities.

The evidence log is especially important because it demonstrates that HMRC is not interested only in formal legal documentation. Its examples refer to personnel records, interviews with senior employees and reviews of communications between functional management and the UK leadership team. In other words, HMRC is looking for evidence of how decisions were actually made, by whom they were made and where the relevant decision-makers were located.

The staff profile requires the group to identify employees by grade and location, including executive levels, while the overseas-entity profile focuses on the sources of revenue and the jurisdictions in which costs are incurred. HMRC’s own examples contemplate an intellectual-property company receiving substantial royalty income while incurring comparatively limited expenditure locally and relying on significant activities performed by related parties elsewhere.

Although these schedules have been designed for transfer pricing purposes, they may reveal considerably more than whether an arm’s length price has been charged. A profile showing that an overseas principal earns a substantial proportion of the group’s profit while employing few suitably qualified people does not, by itself, prove that the transfer pricing policy is incorrect, nor does it automatically produce a CFC charge. It does, however, lead directly to a more fundamental question: if the overseas company did not have the relevant personnel, who actually made the decisions that justified its entitlement to the profit?

That question sits at the centre of both transfer pricing and the UK CFC regime.

Transfer pricing remains the first remedy

HMRC’s published CFC guidance confirms that transfer pricing is the primary remedy for an inappropriate division of profit between companies within a group. Chapter 4 of the CFC charge gateway becomes relevant where transfer pricing does not fully address the separation between profits allocated to a CFC and the activities supporting the assets and risks from which those profits arise.

The order of analysis is therefore critical. The first step is to determine the actual controlled transaction and the arm’s length remuneration of the parties, which requires more than a review of the written agreements. The group must establish which functions were actually performed, which assets were used, which risks were contractually allocated, who exercised control over those risks, whether the relevant entity had the financial capacity to assume them and whether the conduct of the parties was consistent with the contractual arrangements.

A transfer pricing adjustment may be sufficient to reward the UK company for the value it has created. That does not, however, necessarily resolve the wider issue, because there is an important distinction between remunerating a UK company for services provided to an overseas principal and concluding that the overseas company was, in substance, capable of acting as the principal.

The first question is one of pricing. The second is one of economic ownership, risk control and profit attribution.

When transfer pricing is not the end of the matter

Under Chapter 4, the CFC analysis may examine profits arising from assets legally owned, or risks contractually borne, by a foreign company where the management of those assets and risks is exercised to a significant extent through UK activities.

HMRC describes the relevant concern as a situation in which the CFC is reliant on activity performed in the United Kingdom in order to take on and manage its assets and risks in a commercially effective manner. The statutory analysis therefore focuses on significant people functions, which are generally the functions involving active decision-making in relation to the initial assumption of risk, the subsequent management of that risk and the economic ownership and management of relevant assets.

The emphasis is not on job titles, broad descriptions of responsibility or the formal location of board meetings. The analysis turns on what individuals actually do, the authority they possess, the information available to them and the extent to which they genuinely determine the course of action taken by the business.

This is where many foreign-principal structures become vulnerable. The overseas company may have directors who attend meetings and sign resolutions stating that they have considered and approved the relevant proposal, but the substantive question is whether those directors received the relevant information before the decision had effectively been taken, whether they had the competence to assess it, whether they considered credible alternatives, whether they had authority to reject or modify the proposal and whether they remained responsible for managing the consequences of the decision.

Formal approval is not the same as active decision-making, and a signature proves only that a document was signed. It does not establish who made the decision.

The same facts may create two different tax questions

Consider an overseas company that owns the group’s intellectual property and receives substantial royalty income. The UK company performs product development, technical management and commercial strategy functions and receives a cost-plus return.

From a transfer pricing perspective, the review would first ask whether the UK company’s remuneration properly reflects the functions performed, the assets used and the risks assumed or controlled. The group might conclude that a higher return should be allocated to the United Kingdom, and that adjustment might adequately resolve the transfer pricing issue.

The CFC question is different. Suppose the evidence also shows that the overseas company did not decide which intellectual-property projects should be pursued, that its directors lacked the technical capability to assess the relevant risks, that UK management approved the expenditure and controlled the development programme, and that the overseas company could not materially alter the strategy without UK approval.

The issue is then no longer limited to whether the UK company was under-remunerated. The more fundamental question is whether the profits remaining in the overseas company arise from assets or risks whose relevant significant people functions were performed in the United Kingdom.

Not every such case will produce chargeable profits. The detailed Chapter 3 and Chapter 4 conditions, statutory exclusions and available CFC exemptions must still be considered, and many foreign subsidiaries will remain outside the CFC charge or qualify for an exemption. Nevertheless, the transfer pricing review may have assembled precisely the factual evidence needed to identify a CFC risk that had previously remained hidden.

A practical test for the foreign principal

A foreign principal should be capable of answering four connected questions with contemporaneous evidence.

The first is what the company actually decided. There should be identifiable decisions concerning the assets and risks from which its profits arise, rather than a general assertion that the board was responsible for strategic matters.

The second is who made those decisions. The relevant individuals should be identifiable, suitably qualified and located in the jurisdiction in which the group claims that control was exercised.

The third is when the decisions were made. The evidence should demonstrate that the overseas company made the decision before implementation commenced, rather than ratifying a course of action that had already been developed and effectively approved in the United Kingdom.

The fourth is what the company could realistically have decided differently. A company that lacks the authority, information or capability to reject, postpone or materially amend a proposal may not be exercising genuine control over the relevant risk.

These questions cannot be answered solely by producing more detailed board minutes after the event. They require contemporaneous evidence of the decision-making process itself.

HMRC is also building a clearer map

The expansion of the TP&PDCF did not occur in isolation. On 16 June 2026, HMRC opened its technical consultation on the detailed operation of the International Controlled Transactions Schedule, or ICTS, which the government intends to apply to accounting periods beginning on or after 1 January 2027.

The stated objective of the ICTS is to provide HMRC with structured information capable of supporting automated, data-led identification of transfer pricing and permanent-establishment risk. Although the ICTS is not a CFC return, it will give HMRC greater visibility over the identity and location of overseas counterparties, the nature and value of related-party transactions, the transfer pricing methods applied and the foreign entities to which UK-connected profit streams are directed.

Taken together, the two June 2026 developments indicate a clear direction of travel. The TP&PDCF shows groups the type of evidence HMRC expects when a material transfer pricing risk is reviewed, while the ICTS is designed to help HMRC identify which groups and transactions warrant that review.

The practical inference is difficult to ignore. Structures under which substantial profits arise in overseas entities with limited personnel, limited local expenditure and limited decision-making capability are likely to become increasingly visible.

What happened after the review

The group did not immediately dismantle the structure, nor did it attempt to solve the problem by preparing more elaborate board minutes.

Instead, it separated the analysis into three distinct but connected questions. First, it reconsidered whether the UK company had received an arm’s length reward for the functions it had actually performed. Second, it reviewed whether the overseas company genuinely controlled the assets and risks allocated to it. Third, it carried out a separate CFC gateway analysis to determine whether any profits remaining overseas were attributable to UK significant people functions and whether the relevant statutory conditions or exemptions applied.

The outcome was not a cosmetic adjustment. The transfer pricing policy was revised, certain decision-making responsibilities were transferred to individuals with genuine competence and authority, information was provided to the overseas board before decisions were made, and the governance process was redesigned so that the evidence reflected the actual conduct of the parties rather than attempting to reconstruct that conduct retrospectively.

The group ultimately recognised that it did not need a better-documented paper principal. It needed either a genuine foreign principal or a profit allocation that reflected where the business was actually managed.

The question international groups should ask now

For many multinational groups, the most important transfer pricing question is no longer whether they have an intercompany agreement and a benchmarking study. It is whether they could evidence, decision by decision, why the overseas company is entitled to the profit allocated to it.

The transfer pricing file may establish the price of an intercompany transaction, but the CFC analysis asks whether the foreign company genuinely performed the functions that allowed it to own the relevant assets, assume the relevant risks and retain the resulting profit.

The expanded TP&PDCF has made clear the type of evidence HMRC expects to see, while the forthcoming ICTS will make the underlying transactions easier for HMRC to identify. The foreign principal should therefore be tested before HMRC tests it.

How Vectigalis Tax can assist

Vectigalis Tax advises UK and international groups on the interaction between transfer pricing policies, operational substance and the controlled foreign company regime.

Our work includes functional and economic analyses, reviews of foreign-principal and intellectual-property structures, control-over-risk and significant people function assessments, transfer pricing policy design and implementation reviews, CFC gateway and exemption analyses, alignment of intercompany agreements with actual conduct, preparation of HMRC-defendable evidence files and readiness reviews for the expanded TP&PDCF and forthcoming ICTS regime.

A structure should not be tested only by whether its documents are technically well drafted. It should be tested by whether the people, decisions and contemporaneous evidence support the profits allocated to each jurisdiction.

For a confidential discussion concerning your group’s transfer pricing and CFC position, please contact:

Vectigalis Tax

Mail: angelo@vectigalistax.co.uk
Website: www.vectigalistax.co.uk