Contracting In the UK

It is quite common for contractors in the UK to be advised by a British accountant to set up their own Limited company.  Provided  that  the individual is not caught by the so called “IR35” anti avoidance legislation, this can be a highly effective solution.

This usually works by paying the owner / director a small salary, but paying out the bulk of income generated by way of a dividend. The net effect of this is that substantial savings of national insurance (both employer and employee) can be made as compared with the individual being paid as an employee through PAYE.  It also offers lower rates of National Insurance than for someone operating on a self-employed basis.

However, Americans – who are subject to US as well as well UK tax on their income – need to be aware that owning a non US company has significant US tax implications.

US Reporting Requirements
​Any American owning more than 10% of an overseas company is likely to need to make informational filings (Form 5471, Form 8858 or Form 8865) as part of their annual Federal Tax Return.  These forms are essentially summarised tax accounts giving the IRS information about the company’s income statement and balance sheet. Preparation of these is relatively onerous and complicated and is likely to significantly increase the costs of preparing your return.  In addition there are substantial penalties that apply for a failure to file or for late filing of the forms – even if no US tax is due.

US Tax implications

By default the IRS will treat a UK limited company as a corporation for US tax purposes.  This has some important implications:
  1. Although you may regard yourself as being “self-employed” and the income – both salary and dividends - as resulting from the fruits of your labour. The IRS will look at the dividends very differently. The dividends are no longer regarded as “earned” income, but rather as dividends (“passive” income).  This means that the dividend income no longer meets the requirements for the Foreign Earned Income Exclusion to be claimed. Instead you will need to rely upon Foreign Tax Credits to mitigate your US tax bill.
  2. You may end up with a US tax charge on your UK dividends.  This can arise because the US has quite strict requirements for when a foreign tax credit is eligible for offset against a US tax bill.  You can easily find that if you pay your UK tax bill on your dividends when it is due, this is too late for it to be available to offset against  your US tax bill – resulting in an additional US tax charge.
  3. In addition The Tax Cuts and Jobs Act of 2017 introduced fundamental change to the way the US taxes the income of foreign corporations owned by Americans. In particular the concept of Global Intangible Low-Taxed Income or GILTI. This can have unpleasant consequences needs to be properly addressed. 
This does not mean that an American should rule out setting up a UK limited company – it can still in many cases be an advantageous move.  With proper advance planning it should normally be possible to avoid additional US tax charges, however these will need to be properly thought through and implemented in good time – by the time you are getting ready file your US tax return it will often be too late. The new GILTI provisions only make this more important.

How can we help:

  • By advising you on the US and UK tax implications of either operating through a limited company or on a self-employed basis and helping you to choose the solution that best fits your circumstances.
  • By preparing US tax returns covering all of your reporting requirement for you and the company.