The Trump administration is preparing to escalate its trade dispute with the United Kingdom by considering the use of a 91-year-old tax rule, potentially doubling tax rates on British firms operating in the United States. Experts warn that this move could have a more severe impact on UK businesses than tariffs.
The rule in question, Section 891 of the US Internal Revenue Code, was introduced in 1934 and grants the president the authority to raise taxes on the US subsidiaries of foreign companies if their home countries are deemed to discriminate against American businesses. While never before invoked, the Trump administration is now actively exploring its potential use. On the first day of his second term, President Trump ordered officials to investigate which countries impose discriminatory taxes on US firms. The review has since been completed, with the UK reportedly identified as one of the countries of concern, along with other OECD nations.
The news follows the White House’s recent announcement of tariffs as high as 49% on goods from dozens of countries, including a 10% blanket tariff on British imports. However, tax specialists believe that the use of Section 891 could be even more damaging than the tariffs. “That’s the next battle in the trade war, and potentially affects the UK much more than the tariffs,” said Tim Sarson, head of tax policy at KPMG UK. “We’re a services economy, and this obviously affects service transactions as well.”
Central to the administration’s concerns are UK tax policies that are perceived as unfairly targeting American firms, particularly large tech companies. The UK’s Digital Services Tax, which was introduced in 2020, levies a 2% tax on UK revenues from tech companies generating more than £500 million globally. Many of the firms affected are based in the US. Also under scrutiny is the UK’s undertaxed profits rule, which allows the UK tax authorities (HMRC) to apply a “top-up” tax on companies based in low-tax jurisdictions, including some US states, if they fall below the global minimum tax rate of 15%.
Additionally, the UK’s Diverted Profits Tax, often called the “Google Tax,” is another point of contention. Introduced under former Chancellor George Osborne, this measure targets companies that shift profits to low-tax countries while maintaining substantial operations in the UK.
One senior US tax adviser familiar with the administration’s discussions remarked, “If any country was going to end up on the list, it was going to be the UK.”
The Trump administration is also considering an alternative measure under Section 899, which would raise taxes incrementally by 5% each year, rather than doubling the rate immediately. While less dramatic, this approach would still significantly affect foreign companies operating in the US.
However, legal challenges remain regarding the enforceability of these measures. Existing US-UK tax treaties and trade agreements may offer protections against sudden increases in tax rates, although this could ultimately lead to legal disputes or require diplomatic negotiations.
For UK-based businesses with substantial US operations, particularly in sectors such as technology, finance, and professional services, the threat of punitive taxes adds another layer of uncertainty at a time when markets are already jittery due to tariffs and rising geopolitical tensions.
If implemented, Section 891 would mark a major shift in the UK-US economic relationship, focusing attention on cross-border taxation of services and intellectual property. As the situation develops, business leaders and trade associations are likely to urge the UK government to engage with Washington diplomatically to avoid retaliatory measures and maintain investor confidence in UK firms operating globally.
