Advanced Taxation (UK) · Corporation tax: the comprehensive calculation of the corporation tax liability, including overseas aspects

Transfer Pricing, CFCs and Anti-Avoidance for ACCA ATX-UK

Updated 11 October 2026

Transfer pricing makes connected parties price transactions at arm's length, with an SME exemption. The CFC rules tax UK companies on certain profits of low-taxed controlled foreign companies. The corporate interest restriction limits interest deductions for large groups. Work out which regime applies, test its conditions, then compute the adjustment or charge.

Understand Transfer Pricing, CFCs and Anti-Avoidance

UK companies can shift profit abroad in three main ways: by pricing deals with related parties at non-commercial prices, by parking profits in a low-tax foreign subsidiary, and by loading UK companies with debt so that interest deductions wipe out UK profits. Each of the three rules targets one of these.

Transfer pricing applies where two parties are connected (one participates in the management, control or capital of the other, or both are under common control) and the terms of their transaction differ from those independent parties would agree, giving a UK tax advantage. The profits are recomputed as if the transaction were at arm's length. The adjustment is made in the computation of the UK company's profits, normally increasing UK profit. Small and medium-sized enterprises (SMEs) are generally exempt. The size tests (staff headcount, turnover and balance sheet total) are applied to the whole group. The exact size limits are not in the ACCA tax tables supplied in the exam, so confirm them against your current ATX-UK study text and the legislation before you rely on them. The exemption does not cover transactions with parties in non-qualifying territories. Check the definition of a qualifying territory in your study text. HMRC can also direct that a medium-sized company is not exempt.

Controlled foreign companies (CFCs): a CFC is a non-UK resident company controlled by UK residents. The charge works in stages. First, test the charge gateways, which decide which of the CFC's profits can be caught. The gateways include the business profits gateway (profits attributable to significant people functions carried out in the UK), non-trading finance profits, trading finance profits, banking business, insurance business including captive insurance, and solo consolidation. Learn the exact list and conditions from your study text. Then check the entity-level exemptions, which can switch the charge off: the exempt period, excluded territories, low profits, low profit margin, or the tax exemption (the CFC pays local tax of at least 75% of the equivalent UK tax). If no exemption applies, the profits that passed a gateway are apportioned to UK resident companies with a relevant interest of at least 25%, counting interests they hold together with connected or associated persons. Those profits are charged to corporation tax, with credit for the foreign tax suffered. In the exam you can show the gateways and the exemptions in either order, but cover both.

Corporate interest restriction (CIR): this limits the net interest deduction of large groups. The usual figures are a de minimis of £2 million a year and a fixed ratio of 30% of tax-EBITDA. Neither figure is in the ACCA tax tables provided, so confirm them, and the detailed conditions, against the current ATX-UK syllabus and study text. Tax-EBITDA is, broadly, the group's taxable profits before net interest, capital allowances and loss reliefs. Under the fixed ratio method, interest capacity is the fixed percentage of tax-EBITDA. Under the group ratio method, capacity is based on the worldwide group's external interest relative to its group-EBITDA, applied to tax-EBITDA. The allowed deduction is the lower of the actual net interest expense and the higher of the de minimis and the capacity. The disallowed interest is added back in the UK computations.

The provided ACCA tax tables do not give the transfer pricing size limits, the CFC tests or the CIR figures. Learn them from your study text, and rely on figures given in the question. Remember that the exam says to assume 2025/26 rates apply, so the main corporation tax rate is 25% and the small profits rate is 19%.

Key rules to remember

Transfer pricing arm's length adjustment: Adjusted profit = actual profit ± (arm's length price − actual price); Applies to connected parties where there is a UK tax advantage. Normally increases UK profit.
SME exemption: medium-sized: Group staff, group turnover and group balance sheet total all tested against the medium-sized limits in your study text; The limits are not in the ACCA tax tables; confirm them against your study text. Not available for transactions with non-qualifying territories, or if HMRC directs otherwise.
SME exemption: small: Group staff, group turnover and group balance sheet total all tested against the small-company limits in your study text; The limits are not in the ACCA tax tables; confirm them against your study text. Tested for the whole group, as for medium-sized. Same exclusions as for medium-sized.
CFC tax exemption test: Local tax paid ≥ 75% × equivalent UK corporation tax; One of the entity-level exemptions (with exempt period, excluded territories, low profits and low profit margin). If one is met, it switches the CFC charge off even where profits pass a gateway.
CFC charge threshold: UK company's relevant interest in CFC (own interest plus interests held with connected or associated persons) ≥ 25%; Gateway profits are apportioned to UK resident companies with a relevant interest of at least 25%. Charge is on the apportioned profits, with credit for foreign tax.
CIR de minimis: Net interest expense ≤ £2m per year: no restriction; Group-wide figure, not per company. Not in the ACCA tax tables; confirm against the current ATX-UK syllabus and study text.
CIR fixed ratio method: Allowed net interest = lower of (net interest expense) and (higher of £2m and 30% × tax-EBITDA); The 30% and £2m are not in the ACCA tax tables; confirm them against your study text. Tax-EBITDA is broadly taxable profits before net interest, capital allowances and loss reliefs. The deduction can never exceed the actual net interest expense. If a question gives group-level limits that apply, follow its figures.
CIR group ratio method: Capacity = group ratio percentage × tax-EBITDA; A separate alternative to the fixed ratio method. The group ratio percentage is based on the worldwide group's external interest relative to its group-EBITDA. Use it only where the question gives the figures. Allowed net interest is then the lower of net interest expense and the higher of the de minimis and this capacity.
Corporation tax rates (ACCA tables): Small profits rate 19%; main rate 25%; limits £50,000 and £250,000; marginal relief = (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Use these to value any adjustment.

How to solve Transfer Pricing, CFCs and Anti-Avoidance questions

Pick the regime the scenario points to, test the entry conditions in order, then compute the effect and explain it in the requirement's format.

1Read the requirement and mark whether it asks for a calculation, advice or both.
2Identify the regime: connected parties and non-market prices point to transfer pricing; a foreign subsidiary in a low-tax territory points to the CFC rules; large group interest costs point to the CIR.
3For transfer pricing, confirm the parties are connected and a UK tax advantage arises, then test SME status for the whole group (staff, turnover or balance sheet, using the limits from your study text), whether the other party is in a qualifying territory, and whether HMRC has directed that the exemption does not apply.
4For a CFC, test control, then the gateways to find which profits are caught, then each exemption that could switch the charge off (including the 75% tax test). Apportion any remaining profits to UK resident companies with a relevant interest of at least 25%, counting interests held with connected persons.
5For the CIR, find net interest expense and compare it with the de minimis (usually £2 million; confirm in your study text). If it is higher, compute capacity: under the fixed ratio method, the fixed percentage (usually 30%) of tax-EBITDA, or under the group ratio method, the group ratio percentage × tax-EBITDA. Take the higher of that and the de minimis. The allowed deduction is the lower of that figure and the actual net interest expense.
6Compute the extra profit or disallowance, and apply the right corporation tax rate (19%, 25% or marginal relief). Show all workings, rounded to the nearest £.
7Write a short conclusion with advice, noting any credit for foreign tax and the need for documentation or elections.
8Add a line on professional skills: state assumptions, and flag where HMRC may challenge the position.

Quickest way: Three-gate screening

When to use it: Use when a section A scenario mentions overseas subsidiaries, intra-group sales or high group interest and you must spot the issues fast.

Gate 1 (transfer pricing): connected? Non-market price? SME (tested on the group)? Qualifying territory? If SME, a qualifying territory and no HMRC direction, stop.
Gate 2 (CFC): which profits pass a gateway? Does any exemption switch the charge off (75% tax test, low profits, and so on)? If not, does the UK company have a relevant interest of at least 25% (counting connected persons)?
Gate 3 (CIR): net interest above the de minimis (usually £2m; confirm in your study text)? If yes, take the higher of the de minimis and the interest capacity (usually 30% of tax-EBITDA under the fixed ratio method, or the group ratio percentage × tax-EBITDA), then cap the deduction at actual net interest expense.
Value the result at 25% unless the question states a different rate or profit level.
Write one sentence per gate explaining why it does or does not apply.

Common mistakes in Transfer Pricing, CFCs and Anti-Avoidance

Applying transfer pricing to an SME transaction with a treaty territory
Students remember the arm's length rule but forget the SME exemption.
Fix: Always test SME size on a group basis, whether the other party is in a qualifying territory, and whether HMRC has directed otherwise, before adjusting.
Charging all CFC profits to tax
Students stop after finding a low-tax subsidiary.
Fix: Test the gateways to find which profits are caught, check whether any exemption switches the charge off, then charge only the remaining gateway profits, apportioned by the UK company's interest.
Forgetting the 25% interest condition in the CFC charge
Students focus on control rather than the UK company's share.
Fix: Check that the UK company's relevant interest, including interests held with connected or associated persons, is at least 25% before any charge arises.
Treating the £2 million CIR limit as per company
Students assume each company has its own limit.
Fix: The de minimis is for the whole group's net interest expense.
Disallowing the whole interest above £2m regardless of the fixed ratio
Students ignore the 30% of tax-EBITDA calculation.
Fix: Compute 30% of tax-EBITDA, take the higher of that and £2m, and cap the deduction at actual net interest expense. Disallowed interest is net interest less the allowed amount.
Applying the wrong corporation tax rate to adjustments
Students use 19% automatically.
Fix: Check total profits against the £50,000 and £250,000 limits and use marginal relief where needed.

Worked examples

Example 1

UK Ltd is a large group company. It sold goods to its parent, Parent Inc, resident in a non-qualifying territory, for £800,000. The arm's length price was £1,000,000. UK Ltd's profits are well above £250,000. Calculate the effect and say whether the position would change if UK Ltd were medium-sized and Parent Inc were in a qualifying territory.

Show the solution

The companies are connected (parent and subsidiary) and the price is below arm's length, giving a UK tax advantage.
UK Ltd is large, so the SME exemption is unavailable.
Adjustment: £1,000,000 − £800,000 = £200,000 added to UK trading profits.
Profits exceed £250,000, so the main rate of 25% applies.
Extra corporation tax: £200,000 × 25% = £50,000.
If UK Ltd were medium-sized and the counterparty were in a qualifying territory, the exemption would apply and no adjustment would be made unless HMRC directed otherwise.

Answer: UK Ltd's trading profit increases by £200,000, adding £50,000 of corporation tax. If medium-sized and the counterparty is in a qualifying territory, the exemption normally removes the adjustment.

Example 2

A UK group has net tax-interest expense of £6,000,000 and tax-EBITDA of £12,000,000 for the year. Assume the fixed ratio method applies, with a fixed ratio of 30% and a de minimis of £2,000,000 (confirm these figures against your study text; the ACCA tables do not give them). The main rate of 25% applies. Calculate the interest disallowed and the extra corporation tax.

Show the solution

Net interest expense is £6,000,000, which exceeds the £2,000,000 de minimis, so the CIR is relevant.
Fixed ratio capacity = 30% × £12,000,000 = £3,600,000.
The allowed deduction is the higher of £2,000,000 and £3,600,000, which is £3,600,000. It is below the actual £6,000,000, so the allowed deduction is £3,600,000.
Disallowed interest = £6,000,000 − £3,600,000 = £2,400,000.
Extra corporation tax = £2,400,000 × 25% = £600,000.

Answer: Disallowed interest is £2,400,000 and the extra corporation tax is £600,000.

Exam tips

In section A, scan for overseas subsidiaries, related-party sales and large loans. These are the signals for this topic.
State the condition, apply it to the facts and give the conclusion for each test. Marks are for the application, not the recital.
Always show the size test for SME status with the staff, turnover and balance sheet figures.
For the CFC, list the exemptions you checked even when one fails, since markers reward the structured reasoning.
Use a short final paragraph for advice and professional skills, for example flagging documentation, HMRC challenge risk and the effect of foreign tax credit.

Practice questions from Corporation tax: the comprehensive calculation of the corporation tax liability, including overseas aspects

Transfer Pricing, CFCs and Anti-Avoidance: frequently asked questions

Does the UK transfer pricing SME exemption always apply?

No. Small and medium-sized companies are generally exempt, but not for transactions with parties in non-qualifying territories. HMRC can also direct that a medium-sized company is not exempt. Check size, territory and any direction in the question.

What is a CFC charge gateway?

It is a set of tests that decide which CFC profits are brought into charge for UK companies. Only profits that pass through a gateway, such as those attributable to UK significant people functions or finance profits, can be taxed. If a CFC exemption then applies, no charge arises even on profits that passed a gateway.

What is the corporate interest restriction de minimis?

A group whose net interest expense is no more than the de minimis, usually £2 million a year, is not restricted. Above that, the deduction is limited using the fixed ratio method (usually 30% of tax-EBITDA) or the group ratio method. The figure is group-wide. It is not in the ACCA tax tables, so confirm it against your study text.

Will I get the CFC thresholds in the ATX-UK tax tables?

The ACCA tax tables supply rates, allowances and the corporation tax limits, but you should learn the CFC tests, the SME size limits and the CIR conditions yourself and confirm them against your study text. Use any figures a question provides over your memory.