The UK’s HMRC updated its Transfer Pricing Guidelines for Compliance (GfC7) on 19 December 2025, introducing two new sections:
The changes reflect broader themes in HMRC’s guidelines: HMRC’s continued push for groups and specialists to move away from generic reports and towards documentation that is tailored to the specific businesses involved, and a warning against transfer pricing policy designs that lack substance or commercial justification.
This article will focus on the value chain analysis, a wide-reaching update that may be important for transfer pricing specialists, in-house tax teams and finance roles responsible for tax to be familiar with.
HMRC now recommend embedding a value chain analysis (VCA) within a transfer pricing functional analysis as a tool to improve quality and reliability, particularly in higher-risk or non-routine cases.
Before considering when and how to apply a VCA, it’s worth reflecting on its alignment with the OECD transfer pricing guidelines and first principles.
The OECD transfer pricing guidelines (TPG) do not define VCA (nor use the term), and HMRC does not attempt a formal definition either, or require such an analysis to be performed. Instead, the OECD guidance emphasises functional analysis that considers entity-level contributions to group value creation:
So, if the OECD does not require a value chain analysis, which HMRC is upfront about, what are the benefits of doing it?
HMRC sets out when a VCA can improve a functional analysis (2.2.8.1). In my view, these benefits stem from the multisided nature of a VCA – and what this lends to a functional analysis, which inherently provides a group-wide perspective.
The VCA guidance is clearly not being set up as a hoop to jump through (which would defeat the purpose if it’s done in a cursory manner); rather, it’s positioned as part of a recommended process to help HMRC and taxpayers understand group operations -- routine, key, and “secret sauce” -- to ensure that UK transfer pricing policies are coherent and aligned within the overall group context.
This leads to the next question: what is this really about? HMRC may be implicitly pushing back against being presented with fragmented viewpoints, particularly where intangible-related returns are concerned. This theme appears elsewhere in GfC7 — for example, the general risk indicator on fragmentation of multifunctional entities into numerous “routine” policies that depress returns compared to a holistic view and as a risk aspect of “above-market intragroup services.”
The update encourages groups — especially those with UK senior leadership and key decision-makers — to perform a detailed functional analysis that properly appraises the UK’s contribution to value creation relative to the rest of the group. HMRC repeatedly warn against inappropriately high-level functional analysis throughout GfC7 -- this new section is there to help pump up functional analyses that often fall flat.
A VCA, in the academic sense, is a framework for representing discrete activities (core and supporting) that contribute to product value creation, a concept popularised by Michael E. Porter in Competitive Advantage: Creating and Sustaining Superior Performance.
HMRC’s focus is not on the academic VCA framework itself. But it’s easy to see how something like it provides a useful springboard for a detailed functional analysis. No functional or comparability analysis is complete without some level of consideration beyond a list of functions, assets, risks -- what the UK business does -- and into considering how those functions relate to wider generation of value by the group (TPG 1.36) – the UK business’s independencies and the relative value of its contributions.
So, what does an HMRC transfer pricing version of a VCA look like? This can be implied from their seven best practice steps (covered separately below). The steps go way beyond a VCA-like focus, that is, beyond identifying the business value chain: that much is clear in that mapping the value chain and identifying key value drivers are only two of HMRC’s seven best practice steps.
HMRC’s use of the term VCA therefore appears to go beyond what most of us would think of as a VCA, incorporating into the process a full group-wide functional and profit analysis. Perhaps think of this as VCA + or VC&FA (value chain and functional analysis). The emphasis is on elevating functional analysis by linking activities to entities and assessing the relative importance of UK contributions, ultimately comparing profit allocation results with contributions to value creation.
Lingo aside, HMRC’s expectation is clear: functional analyses should explain how and where value is created, enhanced, and captured across the group, with explicit reference to the UK entity’s role.
Most of HMRC’s new guidance that is useful is found in section 2.2.8.4.
Steps 1–3 (broad transaction and industry analysis, and value driver identification) are often already performed by larger groups, typically at the head office level. When documentation exists, review for gaps, such as moving beyond listing activities to showing their economic significance and relative importance. HMRC acknowledge that some of this work may already appear in a master file.
Steps 4–7 are more demanding, requiring detailed knowledge of all group entities and technical application, including a DEMPE analysis and the subjective exercise of comparing actual profit allocation with relative contributions to value creation.
For complex, highly integrated groups, following HMRC’s best practices will be challenging. Outputs include:
A high-level VCA that does not drill into the conduct of the parties and gather high-quality evidence is unlikely to address “common errors in VCA” (2.2.8.5).
HMRC’s main aim is presumably to steer taxpayers away from a process that goes something like this:
Multinational groups should take this opportunity to review their transfer pricing documentation and consider refreshing functional analyses to integrate a global value chain perspective in line with HMRC’s updated guidance. Incorporating VCA improves defensibility and comparability, reducing exposure to transfer pricing challenges, providing a stepping-stone to a more joined up, coherent, global functional analysis.
This should be balanced against proportionality and materiality. As with the rest of GfC7, VCA is not required for all businesses — a high-level value chain description and functional analysis may suffice in some cases.
Simon Wood
BDO in United Kingdom
- 2.2.8 Value chain analysis in functional analysis -- enhanced expectations around functional analysis
- 3.8 Offshore procurement hubs -- a new high-risk indicator
The changes reflect broader themes in HMRC’s guidelines: HMRC’s continued push for groups and specialists to move away from generic reports and towards documentation that is tailored to the specific businesses involved, and a warning against transfer pricing policy designs that lack substance or commercial justification.
This article will focus on the value chain analysis, a wide-reaching update that may be important for transfer pricing specialists, in-house tax teams and finance roles responsible for tax to be familiar with.
Value Chain Analysis in Functional Analysis
HMRC now recommend embedding a value chain analysis (VCA) within a transfer pricing functional analysis as a tool to improve quality and reliability, particularly in higher-risk or non-routine cases.Before considering when and how to apply a VCA, it’s worth reflecting on its alignment with the OECD transfer pricing guidelines and first principles.
The OECD transfer pricing guidelines (TPG) do not define VCA (nor use the term), and HMRC does not attempt a formal definition either, or require such an analysis to be performed. Instead, the OECD guidance emphasises functional analysis that considers entity-level contributions to group value creation:
- TPG paragraph 1.51 – referenced by HMRC to introduce its VCA guidance
- TPG paragraph 1.36 – a functional or comparability analysis should go beyond listing functions, assets, and risks to consider how those functions, assets, and risks relate to wider value generation by the group
- TPG paragraph 6.33 – in the context of intangibles, a functional analysis should identify all factors contributing to value creation, including risks, market characteristics, location, business strategies, and group synergies, across the multinational enterprise and considering global processes and contributions.
So, if the OECD does not require a value chain analysis, which HMRC is upfront about, what are the benefits of doing it?
The Benefits of a Multisided Perspective
HMRC sets out when a VCA can improve a functional analysis (2.2.8.1). In my view, these benefits stem from the multisided nature of a VCA – and what this lends to a functional analysis, which inherently provides a group-wide perspective.The VCA guidance is clearly not being set up as a hoop to jump through (which would defeat the purpose if it’s done in a cursory manner); rather, it’s positioned as part of a recommended process to help HMRC and taxpayers understand group operations -- routine, key, and “secret sauce” -- to ensure that UK transfer pricing policies are coherent and aligned within the overall group context.
This leads to the next question: what is this really about? HMRC may be implicitly pushing back against being presented with fragmented viewpoints, particularly where intangible-related returns are concerned. This theme appears elsewhere in GfC7 — for example, the general risk indicator on fragmentation of multifunctional entities into numerous “routine” policies that depress returns compared to a holistic view and as a risk aspect of “above-market intragroup services.”
The update encourages groups — especially those with UK senior leadership and key decision-makers — to perform a detailed functional analysis that properly appraises the UK’s contribution to value creation relative to the rest of the group. HMRC repeatedly warn against inappropriately high-level functional analysis throughout GfC7 -- this new section is there to help pump up functional analyses that often fall flat.
What is a VCA?
A VCA, in the academic sense, is a framework for representing discrete activities (core and supporting) that contribute to product value creation, a concept popularised by Michael E. Porter in Competitive Advantage: Creating and Sustaining Superior Performance.HMRC’s focus is not on the academic VCA framework itself. But it’s easy to see how something like it provides a useful springboard for a detailed functional analysis. No functional or comparability analysis is complete without some level of consideration beyond a list of functions, assets, risks -- what the UK business does -- and into considering how those functions relate to wider generation of value by the group (TPG 1.36) – the UK business’s independencies and the relative value of its contributions.
So, what does an HMRC transfer pricing version of a VCA look like? This can be implied from their seven best practice steps (covered separately below). The steps go way beyond a VCA-like focus, that is, beyond identifying the business value chain: that much is clear in that mapping the value chain and identifying key value drivers are only two of HMRC’s seven best practice steps.
HMRC’s use of the term VCA therefore appears to go beyond what most of us would think of as a VCA, incorporating into the process a full group-wide functional and profit analysis. Perhaps think of this as VCA + or VC&FA (value chain and functional analysis). The emphasis is on elevating functional analysis by linking activities to entities and assessing the relative importance of UK contributions, ultimately comparing profit allocation results with contributions to value creation.
Lingo aside, HMRC’s expectation is clear: functional analyses should explain how and where value is created, enhanced, and captured across the group, with explicit reference to the UK entity’s role.
Best Practice Steps for VCAs
Most of HMRC’s new guidance that is useful is found in section 2.2.8.4.Steps 1–3 (broad transaction and industry analysis, and value driver identification) are often already performed by larger groups, typically at the head office level. When documentation exists, review for gaps, such as moving beyond listing activities to showing their economic significance and relative importance. HMRC acknowledge that some of this work may already appear in a master file.
Steps 4–7 are more demanding, requiring detailed knowledge of all group entities and technical application, including a DEMPE analysis and the subjective exercise of comparing actual profit allocation with relative contributions to value creation.
For complex, highly integrated groups, following HMRC’s best practices will be challenging. Outputs include:
- Mapping entity participation: identify entities contributing to each value-adding activity or key driver, noting shared or overlapping responsibilities (emphasis here on a multisided analysis)
- Detailed functional analysis: for each entity, viewed in the collective (HMRC are pushing for a comprehensive functional analysis for complex fact patterns)
- Evidence-based documentation: include supporting facts (interview notes, management decisions, contractual terms, asset deployment) to demonstrate alignment with the value chain
What Not to Do
A high-level VCA that does not drill into the conduct of the parties and gather high-quality evidence is unlikely to address “common errors in VCA” (2.2.8.5).HMRC’s main aim is presumably to steer taxpayers away from a process that goes something like this:
- Step 1 - decide the UK is a “routine provider”
- Step 2 – say what the UK does
- Step 3 – state that the UK contribution is routine/limited because that’s what was decided in Step 1.
Recommendation
Multinational groups should take this opportunity to review their transfer pricing documentation and consider refreshing functional analyses to integrate a global value chain perspective in line with HMRC’s updated guidance. Incorporating VCA improves defensibility and comparability, reducing exposure to transfer pricing challenges, providing a stepping-stone to a more joined up, coherent, global functional analysis.This should be balanced against proportionality and materiality. As with the rest of GfC7, VCA is not required for all businesses — a high-level value chain description and functional analysis may suffice in some cases.
Simon Wood
BDO in United Kingdom