What the Finance Bill 2026 Means for Growing UK SMEs: Overseas PE, VAT & Corporation Tax Changes
- Aug 10
- 6 min read
Meta description: Finance Bill 2026 could change how growing UK companies handle overseas branches, VAT and corporation tax. See the key points and practical actions.
Author: Richard
Accountancy support for a growing limited company can start from £85pm+, depending on the services required, transaction volumes and complexity. However, as your company expands into overseas markets, sells through online platforms or manages more complex VAT obligations, basic compliance may no longer be enough.
The draft Finance Bill 2026–27 includes important changes for UK-resident companies, particularly those with overseas permanent establishments. It also sits alongside wider VAT developments that growing businesses should monitor.
This article explains the main points from Deloitte’s August 2026 Monthly Tax Update, the RossMartin SME Tax Update, and the relevant GOV.UK draft legislation.
The headline change: overseas PE exemption becomes mandatory
Many UK companies with overseas branches currently have a choice. They may elect into the foreign permanent establishment exemption, which generally excludes qualifying overseas branch profits and losses from the UK corporation tax calculation.
The draft clauses propose removing that choice.
For most UK-resident companies, the overseas PE exemption would become mandatory for accounting periods beginning on or after 1 January 2027. This means profits and losses attributable to qualifying foreign permanent establishments would generally be excluded from the company’s UK corporation tax computation.
The measure is set out in the government’s Reform of the foreign permanent establishment exemption policy paper.
A permanent establishment could include an overseas branch, office or other fixed place of business that gives the foreign country taxing rights under an applicable double tax treaty. Where there is no treaty, the draft rules refer to the international meaning of a permanent establishment, including the OECD Model Tax Convention.
Why the change matters to growing companies
The most significant practical effect may be the treatment of losses.
Under the mandatory exemption, future losses from an overseas PE will generally not be available to reduce the company’s UK taxable profits. A business that previously relied on foreign branch losses to reduce its UK corporation tax bill may therefore face a higher UK tax liability once the new rules apply.
This could affect a growing company that:
Has opened a staffed office in Europe or another overseas market
Uses an overseas branch while building an international customer base
Has incurred losses during the early stages of overseas expansion
Operates through multiple locations but has not formally reviewed its PE position
Has carried-forward foreign branch losses or other tax attributes
The change does not mean that overseas profits become tax-free. Instead, they will generally fall outside the UK corporation tax calculation and be dealt with under the rules of the country where the permanent establishment operates.
That creates a greater need to understand:
The local corporation tax regime
Foreign filing and payment deadlines
Double tax treaty provisions
Transfer pricing and profit attribution
Currency conversion and accounting records
How overseas results are reported in the UK company accounts
For businesses expanding internationally, a review with corporation tax accountants should take place before the first accounting period beginning on or after 1 January 2027.
Transitional rules and historic foreign branch losses
The draft legislation includes transitional provisions intended to deal with losses and other amounts arising before the new rules take effect.
Growing companies should not assume that historic foreign branch losses will remain available indefinitely. The draft measures include restrictions on the use of certain carried-forward losses and other attributes, including provisions that may require businesses to review previous periods.
The precise result will depend on the company’s history, accounting periods, the location of the PE and how losses have been recorded and used.
Companies should prepare a schedule showing:
Each overseas branch or potential permanent establishment
The dates when each location began trading
Historic profits and losses by location
Losses previously used against UK profits
Losses carried forward at the transition date
The foreign tax treatment of each operation
The relevant treaty or OECD permanent establishment analysis
There are also special commencement rules for certain foreign PEs connected with oil and gas exploration or exploitation. These businesses may be affected earlier than the general 1 January 2027 commencement date.
The draft rules also contain anti-avoidance provisions. Changing an accounting period or restructuring arrangements simply to extend access to the old regime may not produce the intended result.
Online marketplace VAT: what the draft Bill does and does not say
Online marketplace VAT is another major concern for growing e-commerce companies. However, it is important to separate existing marketplace VAT rules from the new overseas PE measure.
The published Finance Bill 2026–27 draft materials do not identify a new general online marketplace VAT liability regime. The mandatory PE exemption is a corporation tax reform; it does not itself change the VAT treatment of sales made through Amazon, eBay, Etsy or other platforms.
Existing VAT rules can still make a marketplace responsible for VAT in particular circumstances. For example, certain platforms may be treated as making the supply themselves, or as responsible for accounting for VAT on particular transactions involving overseas sellers and UK customers.
The result depends on factors such as:
Where the seller is established
Where the goods are located when sold
Whether the goods are imported
The value and type of transaction
Whether the platform is treated as a deemed supplier
Whether the business sells directly as well as through a marketplace
A platform handling VAT on one category of sale does not remove the company’s wider VAT responsibilities. A limited company may still need to manage VAT on direct website sales, invoices, imports, stock movements, business expenses and other supplies.
Other VAT developments to monitor
Deloitte’s August update also highlights several VAT developments that may affect particular sectors.
A zero rate for domestic electricity is expected to apply from 1 October 2026, replacing the current reduced rate for qualifying supplies. Businesses supplying electricity or billing customers through fixed tariffs will need to check their systems and customer communications.
HMRC has also published guidance on the temporary reduced VAT rate for certain children’s meals, tickets and family attractions. That temporary measure applies from 25 June 2026 to 1 September 2026 inclusive, with the correct rate required from 2 September 2026.
These changes illustrate a wider point: VAT mistakes are often caused by systems and processes rather than a lack of effort. A rate change can affect invoices, till systems, online checkout settings, accounting software and management reports at the same time.
Businesses should monitor the HMRC VAT topic guidance and keep written evidence of how VAT decisions have been reached.
What should growing UK SMEs do now?
The best approach is to treat the draft clauses as a planning issue rather than waiting for the final legislation.
1. Map overseas activity
List every overseas office, employee, agent, warehouse and operating location. A company may have a permanent establishment even if it does not describe the location as a branch.
2. Model the tax impact
Calculate what would happen if overseas losses could no longer reduce UK taxable profits. Include cash-flow effects, local tax payments and possible changes to the company’s effective tax rate.
3. Review historic losses
Ask your accountant to identify foreign PE losses, carried-forward amounts and any transitional restrictions that could apply.
4. Separate VAT channels
Review marketplace sales, direct online sales, imports and UK business-to-business transactions separately. Do not assume the marketplace’s VAT treatment covers every transaction.
5. Check your systems
Confirm that accounting software, invoices, checkout systems and VAT reports can handle rate changes and marketplace data accurately.
6. Get advice before expansion
International expansion is easier to manage when tax is considered before signing a lease, hiring overseas staff or moving stock. If you need support, find an accountant for your limited company and explain your overseas, VAT and corporation tax requirements.
Final thoughts
The Finance Bill 2026 draft clauses could create a significant change for UK companies with overseas permanent establishments. From accounting periods beginning on or after 1 January 2027, the foreign branch exemption is expected to become mandatory for most companies, with important consequences for the treatment of overseas profits and losses.
For e-commerce businesses, the key message is different: the draft Bill does not appear to introduce a new general online marketplace VAT liability regime, but existing platform rules remain complex and transaction-specific.
A growing company should therefore review both areas together. The right business accountant UK businesses choose should be able to connect corporation tax planning, overseas operations, VAT controls and cash-flow forecasting rather than treating each issue in isolation.
The draft legislation remains subject to consultation and could change before becoming law. The broader technical consultation closes on 7 September 2026, while the specific foreign PE consultation requests responses by 13 September 2026. Businesses affected by the proposals should monitor the final legislation and obtain advice based on their own circumstances.
This article is for general information only and is not a substitute for advice on your company’s specific tax position.
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