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Compensating adjustments—scope

The transfer pricing provisions include a right to a compensating adjustment equivalent to the amount of transfer pricing adjustment on the advantaged person. Compensating adjustments only apply if the other party to the transfer pricing adjustment is another UK taxpayer. To qualify for a compensating adjustment, the other party to a transfer pricing adjustment (the disadvantaged person) must be within the charge to corporation tax or income tax in respect of profits arising from the relevant activities¹.

It is important to note that even if both taxpayers pay UK tax at the same rate on both the transfer pricing adjustment and the compensating adjustment, this does not mean that a transfer pricing adjustment is unnecessary. To self-assess correctly, the advantaged taxpayer must make an adjustment that increases its profits. However, the other taxpayer can claim a compensating adjustment that decreases its profits by the same amount. Overall, the combined UK position may remain unchanged. However, this depends on whether they are paying tax at the same rate, available losses etc.

HMRC make it clear