INTM436010 - Transfer pricing before CTSA

Overview of the 'old code'

ICTA88/S770 applied to all accounting periods ending on or before 30 June 1999, plus years of assessment to 1998/99, in other words, periods ending before the start date for CTSA, which was the date from which the 'new' code at Schedule 28AA came into effect. ICTA88/S770 is a simpler, more restricted code than its successor, and the differences are significant. It is anticipated that there are now very few open enquires where the application of S770 will be relevant. However, it is useful to retain an overview of S770 because its application has been discussed in TC1 DSG Retail Ltd. and others v. HMRC Commissioners.

The legislation is to be construed in accordance with OECD guidance (see INTM431040), though for ICTA88/S770 that is as a matter of HM Revenue and Customs policy, whereas for Schedule 28AA, the legislation itself is wedded to OECD guidelines (INTM432030). It is suggested that those unfamiliar with the arm's length principle and the importance of the OECD read the first chapter of this module, from INTM431000 onwards.

This legislation is on its way out, but transfer pricing being what it is, there will still be a number of cases falling under ICTA88/S770, so the code is covered here in a reasonable amount of detail. It is difficult to find a copy of this legislation not relegated to a footnote, so the text of the legislation has been reproduced from INTM436100 onwards. ICTA88/S771, being the province of the Energy Group (see below) is omitted.

ICTA88/S770 is 'direction-led' legislation. Unlike Schedule 28AA, ICTA88/S770 does not apply unless the Board of HMRC so directs, under ICTA88/S770(2). This means that HMRC is obliged to seek a direction before seeking to adjust a taxpayer's profits to bring them into line with the arm's length principle. In practice, this is not necessarily a feature of every transfer pricing enquiry, but see INTM436050 for detail on directions and when they are needed. The consequences of the direction requirement are that:

• There is no obligation under ICTA88/S770 for persons to make returns on an arm's length basis.
• Because of the discretionary nature of the legislation, for transfer pricing there are no penalties for an incorrect return. There may be instances where price manipulation, for example, goes beyond being a transfer pricing problem, but such circumstances are not discussed here.

ICTA88/S770 fell under the jurisdiction of the Special Commissioners. Any appeal would now be heard by the Tribunal, and the application would be categorised as a complex case - see INTM434070.

Summary of provisions

ICTA88/S770(1) (Text at INTM436100)

The main transfer pricing provision applies to transactions in 'property' between associated persons where the actual price at which property is sold differs from the arm's length price - that is, the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length.

The legislation is directed primarily against:

• sales at undervalue by United Kingdom resident persons to non-residents, and
• purchases at overvalue by United Kingdom resident persons from non-residents,

i.e. transactions where there will be a consequent understatement of United Kingdom profits. The broad effect of ICTA88/S770 is to treat associated persons (see INTM436040) as if they had done business with each other on the same basis as independent persons dealing at arm's length.

ICTA88/S770(2)

gives exemptions to ICTA88/770(1), broadly excluding transactions which do not create a disadvantage in UK tax terms. It also exempts 'any other sale', unless a direction is in place. In other words, everything is exempted and a direction is required to bring a transaction within the ambit of ICTA88/S770.

ICTA88/S771

This contains legislation applicable only to petroleum companies, and is not reproduced here. Broadly, it extends the application of the transfer pricing legislation to a wider class of UK-UK transactions and to some non-controlled transactions.

The former Energy Group, now part of the Large Business Service, is responsible for applying the transfer pricing rules to a range of transactions involving companies operating in the North Sea. If the company concerned is involved in this part of the energy industry and it is thought that the application of these rules may be considered to be relevant to an enquiry, Officers should consult the Large Business Service, which generally deals directly with companies engaged in such transactions.

ICTA88/S772 (Text at INTM436110)

This lays out HMRC’s information powers in relation to ICTA88/S770 and is considered in more detail at INTM436080.

ICTA88/S773 (Text at INTM436120)

This includes: