For fifteen years, a UK company trading through a branch overseas has been able to choose how that branch is taxed at home. Draft legislation published on 13 July 2026 removes the choice.

The change itself is straightforward to state. What catches people out is the timing. The reform applies to accounting periods beginning on or after 1 January 2027 for most companies, while the anti-avoidance rule that protects it already reaches arrangements made on or after 13 July 2026. The guard arrived before the gate.

This article explains what the exemption does today, exactly what the draft clauses change, who is affected and when, and the three questions worth asking about every affected client before the technical consultation closes on 13 September 2026.

⚠️ Watch: These are draft clauses published for technical consultation, not enacted law. Final wording will be settled at the Budget. Everything below describes a proposal, with the single exception of the anti-avoidance rule, whose commencement date is already fixed at 13 July 2026 in the draft.

A UK-resident company is taxed on its worldwide profits. Where part of its business runs through a permanent establishment abroad, that arrangement can produce double taxation: the branch profits are taxed where the branch sits, and again in the UK.

The UK's answer since 2011 has been the branch exemption in Chapter 3A of Part 2 of CTA 2009. A company makes an election under section 18A, and from then on the profits and the losses of its foreign permanent establishments are left out of its UK corporation tax computation altogether.

The word "election" carries the commercial weight. Because the choice belongs to the company, it can be made where it helps:

• A company with profitable foreign branches elects into the exemption, and the profits fall out of the UK charge.
• A company with loss-making foreign branches stays outside the exemption, and those losses reduce UK taxable profits.

The election is irrevocable once made, which limits the game somewhat, but the initial decision has been a genuine planning point for a decade and a half.

The domestic definition has not always aligned neatly with the treaty definition that determines where the other country taxes. That mismatch has generated argument, and the draft addresses it directly.

The core amendment rewrites section 18A so that exemption adjustments are simply made at the appropriate stages of the computation. Subsection (3), which houses the election machinery, is omitted. Section 18F, which set out the effect of an election, is repealed.

The practical result: from the commencement date, every UK-resident company with a foreign permanent establishment is inside the exemption, whether it wants to be or not.

Sections 18J to 18O are repealed outright, taking with them the total opening negative amount apparatus that governed how pre-exemption losses were dealt with.

In its place sits a restriction applying across the transition. Losses and other amounts allocable to a foreign PE cannot be carried forward into a post-transition period. HMRC's stated policy aim is that losses arising before exemption takes effect will not be available to relieve UK profits of the company or the wider group afterwards, and that losses arising in foreign PEs after that date cannot be offset against UK profits either.

📌 Key date: For most companies the switch happens for accounting periods beginning on or after 1 January 2027. A company with a 31 December year end therefore moves on 1 January 2027. A company with a 31 March year end does not move until 1 April 2027.

A new section 18RA gives "permanent establishment" an international meaning, taken from the applicable treaty arrangements or, failing that, the OECD model. This aligns the domestic test with the treaty test and removes a long-running source of uncertainty.

The draft includes a targeted anti-avoidance rule that counteracts "foreign-PE-related avoidance arrangements". It operates on three conditions:

• Timing. The arrangements were entered into on or after 13 July 2026, or were made contingently before that date and formalised afterwards.
• Purpose. A main purpose is obtaining a tax advantage by shifting amounts between pre- and post-commencement periods, or otherwise exploiting the new rules.
• Abuse. The arrangements can reasonably be regarded as circumventing the intention of the legislation.

Where it applies, HMRC may make "such adjustments as are just and reasonable", by assessment, by amendment of a claim, or by disallowance.

A separate provision addresses the obvious response of manipulating period lengths. Where a company has a short accounting period of under twelve months ending between 13 July 2026 and 31 December 2026, commencement accelerates to the first or second anniversary of that period's start date, with the affected period split for apportionment.

"The reform starts in 2027. The rule that protects it started the day it was published."

Three groups should look hardest:

• Companies currently outside the exemption because their foreign branches lose money. They lose UK relief for those losses. This is the largest and most immediate cash effect.
• Groups with a mix of profitable and loss-making branches that have structured around the election.
• Oil and gas companies with foreign PEs, who face a deemed period end on 31 August 2026 and the shortest runway of anyone.

A UK company that elected into the exemption years ago and has profitable branches sees very little change in outcome. The exemption it chose becomes the exemption it is given.

1. Identify every UK company in the group with a foreign permanent establishment.
2. Record which are currently inside the exemption and which are outside, and why.
3. Quantify the foreign branch losses currently relieving UK profits, and model UK taxable profits without that relief.
4. Note the accounting period end for each company, and calculate the actual commencement date.
5. Flag any oil and gas activity for the 1 September 2026 date.
6. List anything done since 13 July 2026 that touches foreign branch profits, losses or structure.

The technical consultation on the draft clauses runs to 13 September 2026. Technical consultations on draft Finance Bill legislation genuinely do change wording, particularly on transitional mechanics, which is where most of the practical difficulty in this measure sits.

The commencement dates leave real planning time for a 31 December or 31 March year end, and almost none for oil and gas. Clients whose UK tax bill has been quietly reduced by foreign branch losses need to know now, because the effect lands in a future period they are already budgeting for.

Anything done since 13 July 2026 sits inside the anti-avoidance window. Contemporaneous notes explaining the commercial purpose of a step taken this summer are worth considerably more than a reconstruction attempted in an enquiry two years from now.

✅ In practice: When you research a point like this, the useful output is a set of primary documents rather than a summary: the clause, the commencement provision and the policy paper, sitting next to each other where a reviewer can open all three. GAIN Tax returns answers on UK tax questions with the underlying legislation and guidance pinned to each point, so the review starts from a source rather than a recollection, and our published accuracy benchmark sets out how often that holds and where it fails. You can create an account and test it on your own questions.

The foreign permanent establishment exemption is moving from a planning choice to a fixed feature of the corporation tax system. For companies already inside it, very little changes. For companies that stayed outside because their foreign branches were loss-making, UK relief for those losses ends, and the effect is permanent rather than deferred.

Two dates carry the practical work. Accounting periods beginning on or after 1 January 2027 for most companies, 1 September 2026 for oil and gas. And 13 July 2026, already behind us, from which the anti-avoidance rule reaches arrangements made in response to the reform.

The measure is still draft. The direction is settled, the wording is not, and the technical consultation closes on 13 September 2026.

For the wider question of how to research and verify changes like this reliably, our guide to choosing AI tax research software in the UK sets out what to look for. You can also read where our answers come from and how they are kept current, or browse more explainers on the blog.

No. The change is contained in draft Finance Bill clauses published on 13 July 2026 and is out for technical consultation until 13 September 2026. Final legislation is expected to be settled at the Budget. The one part already fixed by date in the draft is the anti-avoidance rule, which applies to arrangements made on or after 13 July 2026.

For most UK-resident companies it applies for accounting periods beginning on or after 1 January 2027. For companies carrying on oil and gas exploration or exploitation activities it starts earlier, on 1 September 2026, with their accounting periods deemed to end on 31 August 2026 so the new regime applies from the following day.

Under the draft, no. Once the exemption applies automatically, both profits and losses of foreign permanent establishments fall out of the UK computation. A transition restriction prevents losses and other amounts allocable to a foreign PE being carried forward into post-transition periods, so pre-commencement losses cannot be preserved for later UK relief.

It is a purpose-based rule counteracting arrangements whose main purpose is obtaining a tax advantage by shifting amounts between pre- and post-commencement periods or otherwise exploiting the new rules. It catches arrangements made on or after 13 July 2026. If anything was restructured over the summer in response to the announcement, it should be reviewed against this rule.

Yes. A new section 18RA gives "permanent establishment" an international meaning drawn from the applicable treaty arrangements, or the OECD model where no treaty applies. This aligns the domestic definition with the treaty definition and settles a mismatch that has caused argument for years.

Identify affected clients, quantify foreign branch losses currently relieving UK profits, calculate each company's actual commencement date from its accounting period end, flag oil and gas activity for the earlier date, and document the commercial purpose of anything done since 13 July 2026. Respond to the technical consultation before 13 September 2026 if you hold a view on the transitional mechanics.