What is transfer pricing and how does it affect intangible assets?

Full Explanation

If your UK startup licences its technology to a subsidiary in a low-tax jurisdiction for 2% of revenue (when market rate is 5%), HMRC can challenge the transfer price and force adjustment. Proper transfer pricing requires charging an 'arm's length' price — what unrelated parties would charge for similar transactions. For intangible assets, determining arm's length price is complex because comparable transaction data is limited. The standard approach is the Comparable Uncontrolled Price (CUP), comparing your licence rate to observable market licences. If unavailable, alternatives include Transactional Net Margin Method (comparing profit margins across entities) or Profit Split Method (allocating profit based on asset contribution). Transfer pricing audits are a major HMRC focus, especially post-BEPS (Base Erosion and Profit Shifting) initiatives. Penalties for mispricing can reach 40% of unpaid tax. For founders with international group structures (common for VC-backed startups expanding globally), maintaining thorough transfer pricing documentation is essential. This includes contemporaneous documentation showing how you determined the price, comparable transaction searches, and professional valuation support.

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