Since 2004, UK tax legislation has required large groups of companies to recognise all transactions between group companies on an arm’s length basis or to adjust the results of such activities for UK taxation purposes. Before that date, UK/UK transactions had been exempt from the transfer pricing rules.

A ‘large’ group is one having more than 250 employees or turnover over €50 million and gross assets of over €43 million. The rules allow exemption from the transfer pricing regulations for small and medium-sized enterprises in most circumstances. Transactions between charities and their trading subsidiaries (if falling within the definition of a ‘large’ group) could be affected.

However, HMRC acknowledges that funding of trading subsidiary companies and transactions between charities and trading subsidiaries are governed by guidance issued from the Charity Commission and it is expected that charities will adhere to this guidance.

It is expected that charities providing loan finance to subsidiary companies will not advance interest-free loans but will charge interest at a commercial rate. It is also expected that a charity will charge its trading subsidiary for indirect expenses incurred on its behalf (for example, staff time and other general overheads) but it is not expected that the charity should seek more than reimbursement of its costs from the trading subsidiary. If the charity seeks a mark-up on its costs it will be held to be carrying out a trading activity and these profits may not fall within the available tax exemptions.

HMRC manuals state that charities may find themselves within the transfer pricing regulations if they have entered into arrangements with their subsidiary companies that are not in accordance with the Charity Commission guidelines, or in instances of tax avoidance.