Doing business in the UK: what international businesses should know about UK tax changes

Do you claim a foreign tax credit on your UK sole trader or partnership business profits? If so, you should know what is happening to UK tax and how your international business is affected.

What is happening and when?

In the UK, from 6 April 2024, unincorporated businesses will be taxed on the profits arising in each tax year (6 April to the following 5 April), regardless of your accounting period end date. Businesses that have a 31 March (or 5 April) year end will not be impacted by this change. Entities deemed to be a corporation for UK tax purposes, which could be a US LLC with any year end, will not be impacted either. This is known as basis period reform.

What is basis period reform?

The new regime will replace the current reporting basis whereby the UK tax liability is calculated using profits from the accounting period ending in the tax year. The basis period reform effectively breaks the link between the accounting date chosen for your business and when you are taxed on your UK profits.

How will the changes be implemented?

To transition, your personal UK 2023/24 tax return will cover the accounting period that ends within the tax year plus the remaining period to 5 April 2024, e.g. the year ended 31 December 2023, plus 1 January 1 2024 to 5 April 5 2024 (or 31 March 2024). Relief for overlap profits will be available but this is not covered here.

Impact on international taxpayers

There will be challenges for international unincorporated business owners under the new system. Taxpayers that also file a tax return overseas may find it commercially impractical to change their year end to 31 March. They will need to apportion and estimate their business profits from two accounting periods to arrive at their UK taxable profit figure, and then refile an amended UK tax return the following year when the final figures are known. This will likely lead to an additional administrative and compliance cost burden. HMRC will also charge late-payment interest on outstanding tax due if the final liability is higher than the provisional estimate submitted.

Foreign tax credits

A personal 2023/24 UK tax return must be filed with HMRC by 31 January 2025, and you may need to make an accurate estimate of the tax due and make payment by 31 December 2024, to provide foreign tax credit alignment. An option in the UK to alleviate taxes paid earlier, under the new regime, will be to spread the cost over five years or less. However, this may not be beneficial to foreign taxpayers, as it could create timing differences in claiming double tax relief which should be factored into your international tax planning.

Next steps

International unincorporated businesses trading in the UK should carefully consider the implications of basis period reform and how it impacts their cash flow and operational structure. Seek a tax health check from our tax advisers to assist you with planning ahead for the changes.

For more details on basic period reform, please read our article on basis period reform.