Transfer pricing concerns the terms that connected parties use when they conduct business with each other. The issue is of most importance for multinational groups that conduct business across international boundaries. The transfer pricing policy of such groups will often have a significant effect on the amount of profit or loss that is recognised in each of the countries in which they do business. For this reason, the issue of transfer pricing is of great importance both for multinational groups and for tax authorities around the world.

In common with most other industrialised countries, the UK has legislation that requires cross border trading and financial transactions between affiliated entities to be conducted according to the arm's length standard. This means that the terms and pricing of such transactions undertaken in the course of conducting business (such as the sale and purchase of goods and services) and in the provision of finance (both borrowing and lending) should be the same as if the transactions had been between completely independent parties.

Typically, the tax rules are designed to catch the non commercial movement of profit from the UK to another country where less tax might be payable.

In the UK every Company is required to make a declaration on its Corporation Tax Return that it has complied with the transfer pricing requirements for tax purposes and that no adjustments to the declared profits are required. If this is subsequently shown to be incorrect the Inland Revenue will impose penalties on the Company.