The following is an extract from the HMRC approach to transfer pricing for large business (Consultation document 20 June 2007)

The UK's Transfer Pricing rules have some important features

• they are based on the internationally recognised "arms length" principle promulgated by the OECD, this can involve the exercise of judgement rather than the application of precise rules;
• they ensure fairness between taxpayers and help to achieve a fair division between countries of the tax base relating to corporate profits enabling international double taxation to be addressed;
• they help to protect the UK base by preventing the artificial diversion of profits;
• they have the potential to impose a significant compliance burden on companies to demonstrate, by assembling evidence, that arm's length results have been used in the calculation of taxable profits;
• they can involve complex analysis and specialist knowledge which can make disputes difficult and lengthy to resolve; 

Arms Length Principle

The arms length principle is open to interpretation in a number of ways
and normally relies upon the established practice in the individual
country.  For UK purposes we treat the following as evidence of the arm’s
length principle

•  Can you identify similar transactions with parties not related to
  the company
•  Analyse the results of this comparison
•  Decide upon which Transfer Pricing method is best to justify the
  analysis
•  Compare and benchmark the margins