If you own a UK company and a US company, you might assume your size protects you from transfer pricing requirements. For purely UK businesses, that’s often true. However, the moment a US entity enters the picture, that assumption can be expensive.
The UK exemption you think covers you
HMRC does exempt most small and medium-sized businesses from formal transfer pricing documentation requirements. If your UK company stays under the relevant size thresholds, you’re generally not required to prepare the detailed reports that larger multinationals must produce.
Here’s the problem though: exemption is a UK domestic rule. It doesn’t extend to your obligations on the US side.
Transfer pricing for SMEs gets complicated the moment a US company is involved, because the IRS doesn’t offer a comparable size-based exemption. A small, family-run US corporation has the same reporting obligations as a much larger one when related-party transactions are involved.
Common ownership still counts
You might own a UK company and a separate US company, with no formal parent-subsidiary link between them. Maybe you set up the US entity independently to enter the American market (meaning no shares cross over, and no group structure on paper).
From a US tax perspective, that doesn’t matter. If you control both companies, they’re “related parties” for transfer pricing purposes regardless of how the ownership is structured. The test looks at who controls the entities, not whether one owns shares in the other.
So when transfer pricing for SMEs comes up in conversation, the common reaction is “but they’re not even connected on paper.” Unfortunately, common individual ownership creates exactly the relationship the rules are designed to catch.
Cash isn’t the only transaction that counts
Many owners think transfer pricing only applies when money physically moves between the two companies. It doesn’t.
Reportable transactions can include:
- Management or consulting services provided between the companies
- Use of intellectual property, branding, or software
- Shared employees or contractors
- Loans, including informal ones with no interest charged
- Inventory or equipment transferred between entities
- Free or below-market use of office space or assets
If your UK company sends your US business “free” administrative support, that’s still a transaction that needs documenting and pricing at arm’s length.
The real cost of getting this wrong
This is where transfer pricing for SMEs becomes a genuine financial risk rather than a compliance technicality.
Form 5472 failures carry a $25,000 penalty per form, and that’s just the starting point. If the failure continues after the IRS sends notice, additional $25,000 penalties apply for every 30-day period that follows with no statutory cap.
Miss this for a couple of years across multiple related-party transactions, and you’re looking at penalties that dwarf whatever you saved by skipping the paperwork.
Building a policy that actually fits an SME
You don’t need the complexity of a multinational’s transfer pricing department. You need something proportionate that protects you:
- Document every cross-border transaction, including non-cash ones, as they happen rather than reconstructing them at year-end
- Set pricing that reflects what unrelated parties would charge for the same service or asset
- Keep simple contemporaneous records explaining your pricing logic
- File Form 5472 correctly and on time if your US company meets the foreign-ownership threshold
- Review your structure whenever ownership or transaction patterns change
Get this sorted before it becomes a penalty notice
Transfer pricing for SMEs isn’t about being a target for HMRC or the IRS. It’s about having basic documentation in place so that if either tax authority asks questions, you have answers ready.
At S.E. Tax Professionals, we work with business owners who have UK and US companies under common ownership. We can review your cross-border transactions, help you build a transfer pricing policy that’s proportionate to your business size, and make sure your US filing obligations are met correctly.
Contact us to get your transfer pricing position reviewed before it becomes a penalty notice.