INTM432010 - Schedule 28AA: how it works

Overview

This applies to accounting periods ending on or after 1 July 1999 and years of assessment from 1999/00.

This replaced the old legislation found from ICTA88/S770 onwards, and brought in some key changes. There is now a requirement to make a return in accordance with arm's length principle in respect of intra group transactions, and the new legislation has a much wider scope.

The legislation applies where the provision between two connected persons differs from the arm’s length provision, and profits used to calculate UK tax are reduced (or losses are increased) as a result of that provision. The broad effect is to treat connected persons as if they had done business with each other on the same basis as independent persons dealing at arm's length - the ‘arm’s length principle’.

The wording of this legislation is aligned with Article 9 (the ‘Associated Enterprises Article’) of the OECD Model Tax Convention on Income and on Capital. Schedule 28AA introduced the idea of 'provision made or imposed as between any two persons....', and this formulation reflects the broader concerns of Article 9, which talks of '…conditions made or imposed between two enterprises...'

However, close conformity to OECD Transfer Pricing Guidelines does not mean that in every case HM Revenue & Customs will be taking a 'broad view' rather than looking at the prices of individual transactions. On the contrary, Schedule 28AA is based on transactions, since the 'provision' referred to above has to be made or imposed 'by means of a transaction or series of transactions'; and the OECD Transfer Pricing Guidelines (in accordance with which this legislation is to be construed - see INTM432030) approve transactional methods of ascertaining an arm's length price.

It is important that you familiarise yourself with the OECD Transfer Pricing Guidelines (HM Revenue & Customs readers may access the Guidelines from the side bar of this page) when you pursue a transfer pricing enquiry