From January 2026, HMRC has replaced the Diverted Profits Tax regime with new Unassessed Transfer Pricing Profits rules.
Unassessed Transfer Pricing Profits: the end of Diverted Profits Tax
The Diverted Profits Tax (DPT) was introduced in 2015 as a controversial 25% charge designed to deter large multinationals from using arrangements that artificially diverted profits away from the UK. For a decade it sat alongside the mainstream corporation tax transfer pricing rules, operating as a separate charge with its own distinct procedure.
From January 2026, DPT has been abolished and replaced by a new regime: the Unassessed Transfer Pricing Profits (UTTP) rules, introduced by Finance Act 2025. The policy intention is to bring what were previously “diverted profits” squarely within the existing transfer pricing framework, but with enhanced HMRC powers and a more structured process for raising and resolving disputes.
What this means in practice is that HMRC will now pursue under-taxed profits through an enhanced transfer pricing enquiry process, with the standard corporation tax rate applying.
Businesses that previously engaged with DPT notices should note that the UTTP process, whilst familiar in structure, has important differences in timing, scope, and the rights available to taxpayers.
What is transfer pricing?
Transfer pricing rules govern the prices charged between connected parties, typically companies within the same corporate group; for goods, services, loans, intellectual property, and any other transaction.
The fundamental rule, established in the OECD Guidelines and protected in UK law under Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), is the arm’s length principle: transactions between related parties must be priced as if agreed between independent parties acting in their own commercial interests.
New UTTP rules
Where a UK company’s profits have been reduced because of non-arm’s length pricing with a related party, HMRC can substitute what the price would have been and tax the notional additional profit. The UTTP rules sit on top of this existing framework, giving HMRC a focused process for dealing with cases where transfer pricing profits are thought to be outstanding and unassessed.
Who is affected?
The UTTP rules are aimed principally at large businesses; those above the SME threshold of 250 employees and either €50 million turnover or €43 million balance sheet total. Businesses below these thresholds are generally exempt from the UK transfer pricing rules unless HMRC has issued a specific notice requiring compliance.
In practice, HMRC’s focus under UTTP is likely to be on multinational groups where there is a meaningful risk that UK profits have been materially reduced through related-party arrangements. That said, the new process can in principle apply to any business within scope of the transfer pricing rules where HMRC considers that profits remain unassessed.
What HMRC will consider
When deciding whether to open a UTTP enquiry, and in determining the extent of any unassessed profits, HMRC will examine a wide range of factors. These broadly mirror the considerations that applied under DPT but are now evaluated through the lens of the arm’s length standard.
A key shift from DPT is that under the old DPT regime, HMRC could pursue arrangements involving an “avoided permanent establishment” or a lack of economic substance without needing to establish a precise arm’s length price. Under UTTP, the analysis is anchored to the arm’s length standard throughout, which in many cases provides more certainty for taxpayers, but also means HMRC’s assessments are more directly challengeable through mutual agreement procedures and double tax treaty relief.
How the UTTP process works
The UTTP regime introduces a structured, staged process that gives businesses the opportunity to engage with HMRC at each step before a formal assessment is raised. Understanding this process is essential both to respond effectively if HMRC makes contact, and to appreciate what is at stake if a business does not engage.
- Preliminary notice: HMRC issues a preliminary notice to the business, setting out its view that there may be unassessed transfer pricing profits and inviting the business to provide information and representations.
- Review period: Following the preliminary notice, there is a defined review period, typically several months, during which the business can provide further documentation, propose amendments to its tax returns, or demonstrate that its transfer pricing is arm’s length.
- Charging notice: If HMRC remains of the view that profits are unassessed following the review period, it will issue a charging notice setting out the proposed adjustment and the additional corporation tax considered to be due.
- Payment and appeal rights: Once a charging notice is issued, the tax must generally be paid, even if the business intends to appeal. This is a significant feature of the UTTP regime: it mirrors the old DPT “pay first, litigate later” approach and means that cash flow should be considered as part of any dispute strategy.
- Resolution: Disputes under the UTTP regime can be resolved through agreement with HMRC (including amended returns and settling the enquiry), by litigation before the Tax Tribunal, or through the MAP process where a treaty partner is involved. In appropriate cases, an Advance Pricing Agreement (APA) can be sought to remove future uncertainty.
At any point before a charging notice is issued, and ideally before a preliminary notice is received, a business can amend its returns to reflect arm’s length pricing and settle any resulting liability voluntarily. This approach typically results in significantly lower penalties, avoids the “pay first” dynamic of a charging notice, and allows a business to manage the process on its own terms.
Penalties and interest
Where additional tax is due under the UTTP rules, HMRC may charge penalties under Schedule 24 of the Finance Act 2007, in addition to interest on the unpaid amount. The penalty framework distinguishes between careless inaccuracies (up to 30% of the potential lost revenue), deliberate inaccuracies (up to 70%), and deliberate and concealed errors (up to 100%). Reduced rates apply where the business makes an unprompted or prompted disclosure.
Ormerod Rutter can help
The introduction of the UTTP regime represents a significant development in the UK’s approach to transfer pricing enforcement. Whether you are reviewing your position for the first time, responding to a preliminary notice, or seeking to put in place a robust policy for the future, early and specialist advice makes a material difference.
Our international tax team works with businesses across a range of sectors to review related-party transactions, prepare compliant documentation, manage voluntary disclosures, and structure pricing arrangements that stand up to scrutiny.
Please get in touch on 01905 777600 or email hello@ormerodrutter.co.uk to discuss your position in confidence.
