US: The One, Big, Beautiful Bill - implications for UK universities

US: The One, Big, Beautiful Bill

On 22 May 2025, "The One, Big, Beautiful Bill," (the Bill) was approved by the House of Representatives. The Bill aims to make the 2017 tax cuts permanent, provide further tax relief, encourage US investment, and retaliate against foreign tax regimes the US deems unfair, particularly digital services taxes (DST), diverted profits taxes (DPT), and the OECD’s undertaxed profits rule (UTPR).

UK universities with financial ties to the US, through endowments, fundraising, research income, or collaborative ventures, could face higher US taxes and increased compliance burdens if the Bill becomes law. The changes are most significant for institutions with substantial US investments or operations, but the broader policy direction may also influence future UK higher education reforms.

UK university employees currently working in the US could face higher withholding taxes on certain payments, stricter rules on compensation and benefits, and possible changes to research funding and fringe benefits. While the Bill is not targeted at individual employees, its provisions for nonprofits and cross-border payments will likely have knock-on effects for UK academic staff in the US.

Key Provisions Affecting UK Taxpayers

• Retaliatory Tax Measures: The Bill introduces new US tax code section 899, targeting non-US taxpayers connected to countries that impose "unfair taxes" on US businesses, such as DST, DPT, or UTPR. The UK, which levies all three, is squarely in scope.
• Increased US Withholding Taxes: For residents and entities "connected" to such "discriminatory foreign countries" (including the UK), the US will increase withholding tax rates on US-source income (such as dividends, interest, royalties, rents, and some service income) by 5% per year, up to a maximum of 20%. This could override treaty benefits - meaning, for example, UK recipients of US dividends (currently taxed at 0% under the US-UK treaty) could eventually face a 20% withholding tax.
• Expansion of BEAT: The Bill expands the Base Erosion and Anti-Abuse Tax (BEAT) regime for US entities owned by residents of targeted countries. Previously, BEAT only applied above certain thresholds, but these would be removed for affected groups, potentially impacting even smaller UK businesses with US subsidiaries.
• Scope: The rules apply broadly, not just to large multinationals, but to any UK-resident individual, company, trust, or partnership, including universities with US income or a US subsidiary.

How might this effect UK universities?

• Increased US Taxes on University Endowments - The Bill proposes a significant rise in the excise tax on net investment income for private university endowments. For institutions with a student-adjusted endowment over $2 million, the excise tax could jump from the current 1.4% to as high as 21%, with a broader definition of what counts as net investment income. If a UK university has a US-based endowment, or if it receives significant investment income from US sources, these higher taxes could directly reduce the funds available for scholarships, research, and operations.

• Broader Scope for Tax on University-Linked Entities - The Bill expands the reach of US tax rules to include related organizations, such as foundations or trusts linked to universities. This means UK universities with US-based charitable arms or fundraising vehicles could see higher tax bills and more complex compliance requirements.

• Withholding Tax Risks - If the UK is designated a "discriminatory foreign country" due to its digital services tax and similar measures, UK universities receiving income from US sources (such as royalties, research funding, or investment returns) could face higher US withholding taxes, potentially up to 20%, even if current treaties would otherwise provide for a lower rate.

• Impact on Collaborative Research and Funding - Increased taxes and compliance burdens could make it more expensive or administratively difficult for UK universities to participate in US-funded research, partnerships, or joint ventures. 

• Indirect Effects on International Students and Staff - While the Bill’s direct tax measures primarily target institutions, any reduction in endowment income or increased administrative costs could affect scholarships, research grants, and the resources available to support international students and faculty. 

• Sector-Wide Policy Implications - The Bill’s focus on risk-sharing and value-for-money in higher education may influence UK policy debates, as the US moves toward holding universities financially accountable for graduate outcomes5. While this is not a direct tax change for UK universities, it signals a shift in how governments may regulate and fund higher education in the future.

How might this effect UK university employees working in the US?

• Taxation of Compensation and Benefits - The Bill expands the US excise tax on excessive compensation paid by tax-exempt organisations. Now, allemployees of a university (not just the top five) could be counted towards the $1 million compensation cap, which whilst rare, may affect highly paid UK university staff on US campuses or secondments. Compensation above this threshold would be subject to a 21% excise tax, and this includes compensation paid by related entities.

• Withholding Tax on Payments - If the UK is designated a "discriminatory foreign country," payments from US sources to UK university employees (such as royalties, consulting fees, or other US-sourced income) could face higher withholding taxes—potentially up to 20%—even if current treaties would otherwise provide for lower rates. This could reduce net pay for UK university staff receiving US-sourced income.

• Research and Grant Income - The Bill tightens rules on what qualifies as tax-exempt income from scientific research. Only research that is "publicly available" is exempt from unrelated business taxable income (UBTI), which is similar to OECD tax treaty rules. Employees working on research projects in the US may see their grant funding or university support affected if the research does not meet these criteria.

• Fringe Benefits and Parking - Nonprofits, including universities, would be taxed at the corporate rate (21%) on the value of parking and transportation benefits provided to employees. This could lead to universities reducing or restructuring such benefits for staff in the US.

• Administrative and Compliance Burdens - The Bill increases compliance requirements for US universities, which may indirectly affect UK employees through changes in benefits, payroll practices, or funding for research and compensation packages.

Timing and Next Steps

• The Bill delays implementation of these measures to allow for international negotiations, with the earliest likely application for the UK being calendar year 2026.
• The Bill must still pass the US Senate, where amendments are possible, but passage is likely given the Republican majority.
• The US administration may use the delay to seek concessions from countries like the UK, potentially watering down or removing DST, DPT, or UTPR to avoid these new US taxes.