Pricing Adjustments & VAT

A recent ECJ ruling has determined that, in certain circumstances, they would constitute consideration for services, bringing them within the scope of VAT. This decision underscores the need for businesses to scrutinise the nature and purpose of TP adjustments, as the VAT implications will depend on whether there is a direct link between the adjustment and a specific supply of goods or services.

Where a TP adjustment or balancing payment is made, and it can be shown to relate directly to a supply – such as management services, royalties, or other intra-group transactions, VAT may be due on the full value.  This would include any additional payments arising from the adjustment. Conversely, if the adjustment is purely an accounting entry with no direct link to a supply, it should remain outside the scope of VAT.

This ruling reinforces the importance of robust transfer pricing documentation and clear contractual arrangements between group entities. Businesses should ensure that the rationale for any TP adjustment is well documented, and that the VAT treatment is considered at the time of the adjustment, not just at year-end. It is also essential to review whether the value declared for VAT purposes reflects the open market value, as HMRC has the power to substitute open market value where transactions between connected parties are not at arm’s length.