INTM436020 - Transfer pricing before CTSA

When does Section S770 apply?

ICTA88/S770 can apply to a transaction between buyer and seller where:

• The buyer controls the seller or 
• The seller controls the buyer or 
• Both are under common control

For more on control see INTM436040 

Profits of the seller

In computing for tax purposes the income, profits or losses of the seller where the actual price is less than the arm's length price, ICTA88/S770 operates to adjust the actual price to the arm's length price, unless the conditions in ICTA88/S770(2)(a)(ii) and (iii) are met, that is unless:

• the buyer is resident in the United Kingdom and
• carries on a trade in the United Kingdom and
• the actual price falls to be deducted in computing the profits etc. of that trade for tax purposes.

Profits of the buyer

In computing for tax purposes the income, profits or losses of the buyer where the actual price is greater than the arm's length price ICTA88/S770(1) operates to adjust the actual price to the arm's length price unless the conditions in ICTA88/S770(2) (b) (ii) and (iii) are met, that is unless:

• the seller is resident in the United Kingdom and
• carries on a trade in the United Kingdom and
• the actual price falls to be regarded as a trading receipt in computing the profits etc. of that trade for tax purposes.

Thus, broadly, transactions between UK traders are excluded. There are of course separate rules for North Sea oil companies.

Transactions caught by Section S770

Not all transactions between UK residents are exempted under ICTA88/s770(2)(a) or (b). So, for example a sale at undervalue to an investment company or a purchase at overvalue from an investment company can be caught, because the investment company is not carrying on a trade within the UK.

However, a challenge cannot be made under ICTA88/S770 on the basis that, were the parties at arm's length to each other, a transaction would not have taken place at all. It is not possible to hypothesise about what would have happened, but every attempt must be made to arrive at an arm's length price, however unlikely the transaction might be. Nor does the legislation extend to transactions to which neither connected person is a party or to wholly third party transactions, such as those described at INTM432050. Such challenges may be made under ICTA88/SCH28AA.

'One way street'

There is no provision for prices at undervalue to be adjusted upwards in the accounts of the UK buyer, or for prices at overvalue to be adjusted downwards in the accounts of the UK seller. In consequence, ICTA88/S770 cannot be used to reduce income or profits or increase losses for tax purposes.

ICTA88/S770 operates transaction by transaction, so that transactions at overvalue and undervalue cannot be netted off against each other or otherwise balances against each other.

What is meant by ‘price’?

ICTA88/S770 is narrowly phrased, compared to Schedule 28AA. Strictly, all it permits is a change in the price of a transaction. In practice, of course, this is not to be construed too narrowly, and it would be usual to examine all the terms and conditions under which the price was set and to look at relationships between members of a multinational group so far as they were relevant

When does a sale take place?

ICTA88/S773(2) says that for the purposes of ICTA88/S770, a sale shall be deemed to take place at the time of completion or when possession is given, whichever is the earlier.