HMRC Sets Median As Default In Transfer Pricing Ranges

Tax Queen

Tax Expert @ Pie

3 min read

In November 2025, HM Revenue & Customs (HMRC) updated its International Manual to clarify the application of transfer pricing ranges for both case teams and taxpayers. The revised guidance outlines a more structured approach to determining the most reliable arm’s length result in transfer pricing benchmarking exercises.

A central feature of the update is a clear preference for using the median point within the interquartile range (IQR) whenever an adjustment must be made. These changes are expected to impact how multinationals prepare, document and defend their transfer pricing positions in the UK.

HMRC’s structured approach to transfer pricing ranges

The HMRC update reinforces the principle that the purpose of any transfer pricing assessment is to identify the most reliable arm’s length outcome, based on all available evidence. Where benchmarking produces a range of potential results,

HMRC expects taxpayers to take several steps. First, comparables should be thoroughly reviewed, with those found to have material flaws excluded from the analysis. Secondly, statistical tools such as the interquartile range are to be employed only when enough reliable data remain after this review.

Where a tested party’s results fall outside the constructed arm’s length range, HMRC guidance now prescribes a robust process for determining the appropriate adjustment.

Median as the adjustment benchmark

The most significant change in the guidance is HMRC’s explicit preference for the median of the IQR as the default point for adjustments, should a taxpayer’s result lie outside the identified range.

HMRC states that this approach, aligned with paragraphs 3.57 and 3.62 of the OECD Transfer Pricing Guidelines, reflects the reality that comparability defects are common. The department contends that the median “maximises the likelihood that the adjusted price falls within the true arm’s length range”.

As a practical matter, this means HMRC’s default negotiation position will be to “meet in the middle”, particularly in contexts where double taxation relief could be sought through the Mutual Agreement Procedure (MAP).

Implications for multinational groups

While HMRC’s clarification does not constitute new law, it establishes firmer expectations for taxpayers and offers insight into the likely direction of compliance reviews and audits.

According to the guidance, taxpayers should anticipate that HMRC will propose adjustments to the median unless they can provide substantial technical justification for selecting a different point. This raises the documentation standard for defending positions at or near the edges of the IQR or using alternative adjustment points. The guidance also underscores that the quality of transfer pricing documentation takes precedence over statistical processing.

HMRC may challenge datasets built on weak or inadequate comparables, and warns that the use of statistical trimming does not compensate for underlying methodological flaws. MAP defensibility is also of increasing importance, as HMRC aims for positions that can be sustained in international dispute resolution, including MAP and Advance Pricing Agreement (APA) negotiations.

Sectors most impacted by the changes

The changes are set to have significant effects on entities that commonly use the transactional net margin method (TNMM), such as routine distributors, contract manufacturers, and service providers.

These business types frequently generate sizeable pools of comparables, some of which may have inconsistent or incomplete datasets, thereby increasing their exposure to HMRC challenges under the new framework.

Groups with slim profit margins or highly volatile annual results may also face increased risk, as small fluctuations could move their performance outside the arm’s length range and trigger median-based adjustments. Industries experiencing rapid evolution, such as technology, life sciences, consumer goods, and logistics, may encounter added difficulties in establishing robust comparability, further elevating risk.

For instance, where an IQR spans from 5 to 15 percent and the median is 10 percent, a policy set at 5 percent would be at the range’s lower boundary. Should a subsequent year’s result fall below this threshold, HMRC may seek an adjustment to the median value, which could represent a markedly higher return.

Action points for compliance and audit readiness

To navigate the revised expectations, multinationals are advised to conduct rigorous reviews of their benchmarking processes. Steps include conducting a reliability audit of all proposed comparables, maintaining detailed documentation of inclusion or exclusion decisions, and ensuring each selected comparable directly ties into the company’s functional analysis.

Where results fall outside the IQR, taxpayers should prepare comprehensive technical justifications if they intend to argue for an adjustment point other than the median. In-year financial monitoring is recommended to keep margins within target ranges and enable proactive corrections ahead of year-end reports.

Taxpayers should also align their MAP and APA policies with the new median-centric approach and update internal governance structures to reflect this significant shift in HMRC practice.

Final Summary

The HMRC’s updated transfer pricing guidance marks a step towards increased standardisation and evidence-based outcomes in UK transfer pricing. While the guidance expresses HMRC’s position rather than creating new legal requirements, it intensifies the need for multinationals to pay close attention to the quality and justification of their benchmarking analyses.

Taxpayers can still pursue alternative approaches when supported by legislation, OECD standards, and robust factual evidence. The developments underscore the ongoing evolution of the UK’s approach to transfer pricing and highlight the benefits of consistent documentation and analysis.

For those seeking to keep up with these and other tax authority changes, tools like the Pie app can offer accessible updates and insights.