Transfer pricing risks: Updates to GfC7

When HMRC first published GfC7, its main objective was to improve transfer pricing compliance and reduce uncertainty by outlining what it thought good transfer pricing documentation and policy design looked like. The guidance was challenging in some places, but it was largely welcomed across the industry as increasing clarity on HMRC’s expectations and how it would assess transfer pricing risk and compliance.  

HMRC has continued to build on this good work, updating the guidelines as and when required. The most recent update in December 2025 brings us two new sections – on where a value chain analysis (VCA) should be used within a functional analysis and the pricing mechanics of offshore procurement hubs. 

A VCA is not a requirement in the OECD Transfer Pricing Guidelines (TPG) or under UK law, so this is not mandatory. However, understanding how value is generated in a group as a whole and how entities within the group contribute towards the value creation has always been critical from a transfer pricing perspective.  

In this context, it seems clear that HMRC are trying to use the VCA as a tool to enhance the quality and reliability of a standard functional analysis in transfer pricing. It aims to support accurate delineation of transactions and, therefore, strengthen documentation. 

HMRC does not expect all businesses or transactions to be documented with a VCA, and it acknowledges that there must be proportionality when deciding whether one is required. It explains that a VCA is particularly valuable where: 

• Several entities contribute towards value creation 
• Unique and valuable contributions are involved 
• A group relies upon integrated supply chains 
• Decentralised strategic level decision making takes place 
• Profit splits have been deemed to be an appropriate methodology for the tested transaction(s) 

In these circumstances, a VCA is deemed helpful for improving the narrative around the accurate delineation of transactions and identifying misalignments in value creation and reward. 

Given the increasing focus HMRC is placing on transfer pricing compliance and documentation quality, businesses should think carefully about whether their existing functional analyses are sufficiently robust or whether they may need a VCA. 

In a welcome addition to the guidelines, HMRC has also included its key risk indicators of poor transfer pricing policy design within procurement structures.  

Offshore procurement hubs are overseas entities that charge UK companies for procurement-related services. They have been an increasing focus for HMRC audits, and the new section reinforces HMRC’s broader GfC7 message that policy design must be supported in substance.  

HMRC has observed that procurement hubs are often over-rewarded relative to the functions they actually perform. They often have limited substance and reduced decision-making responsibilities, so that the rewards they earn are not commensurate with the risks assumed. 

HMRC has flagged some indicators of a higher transfer pricing risk: 

• Strategic procurement decision making, such as supplier selection or pricing authority, sits with the UK or another entity, despite the contracts stipulating that it is undertaken by the procurement hub  
• The procurement hub does not assume any meaningful risk 
• The procurement hub performs routine or administrative activities, such as processing orders or managing invoices, but earns a much higher reward than a routine service provider 
• Documentation doesn’t contain a sufficient functional analysis, including detailing who in the group creates value

The guidance emphasises that simply characterising an entity as a procurement hub does not justify higher returns without robust supporting analysis. HMRC expects taxpayers to be able to demonstrate: 

• Procurement hub remuneration that aligns value creation and risks assumed with actual contribution
• A clear functional analysis showing what procurement activities are performed, by whom, and where key decisions are made 

GfC7 continues to push for higher standards in transfer pricing compliance, making clear HMRC’s evolving expectations. Combined with increasing HMRC enquiries into transfer pricing and the upcoming introduction of the International Controlled Transactions Schedule, it means businesses face a challenging compliance landscape. 

If you’d like to discuss how you can navigate this increasingly complex and demanding environment of any of the recent GfC7 changes, our transfer pricing team are here to support. 

Approval code: NTEH7022604