OPTIONS FOR AMERICAN BUSINESS OWNERS IN THE UNITED KINGDOM
OPTIONS FOR AMERICAN BUSINESS OWNERS IN THE UK The following is designed to provide general tax and business information for those independently relocating to or residing in the United Kingdom and does not constitute legal advice. As with all legal issues, seeking tailored advice from qualified counsel is advisable. As an American doing business in the United Kingdom, you have several options for structuring your activities. Selecting a business structure that will balance tax and administrative efficiency against the legal protections provided by more formal arrangements is key. The decision to organise a UK business does not require most expatriates to consider how their choice of operating structure will be taxed by their country of nationality. For American expatriates, due to the worldwide tax and information reporting regime in place in the United States, crossborder tax implications will remain top of mind for their businesses. The tax and reporting landscape for American business owners abroad has been dynamic in recent years, to put it lightly. This trend is unlikely to change with a new administration and more tax legislation likely on the horizon. During the last administration, changes to UK corporate tax law without question generated a wealth of tax planning and savings opportunities for multi-national and UK-based companies. However, American small business owners living and working abroad did not necessarily feel the love. After these changes, annual tax planning is now an important activity for every American doing business abroad, regardless of the size of the company. Nevertheless, for American expatriate small business owners, this new wave of tax planning is merely designed to reverse the negative impact of these tax law changes. Unfortunately, the prospect of a relatively straightforward tax reporting project is now off the table for any American doing business abroad independently. The information below covers the most common structures for operating UK business activities and provides a summary of the UK tax considerations that should be analysed within the context of each. WWW.THEAMERICANHOUR.COM
Sole Trader
Without question, operating as a sole trader provides the easiest option for setting up and managing the ongoing administration of your UK business affairs. Sole traders simply register their independent business activity with HMRC and are ready to begin work. Note, however, that many businesses selling products or engaging in other regulated activities will still maintain the responsibility to register for Value Added Tax (VAT) and any other relevant licenses that may be applicable to their business. The notable drawback of operating as a sole trader is that no limited liability protection is provided. This means that you would remain personally responsible for debts and other liabilities of the business. Given this lack of protection, operating as a sole trader would be a risky option for most business owners. UK Tax Insights - From a tax reporting perspective, the sole trader structure is by far the most straightforward approach for an American doing business in the UK. The business activity would be reported directly through your personal UK tax return on Schedule C without any need to prepare formal financial statements or run payroll. Moreover, the rate of tax paid on income earned in the UK as a sole trader should more than offset the tax due on the UK side by mechanism of the foreign tax credit. Compliance with UK National Insurance regulations will also provide an exemption from the 15.3% UK selfemployment tax based on the terms of the bilateral Social Security agreement in place between the UK and the UK.
Partnerships
A less common operating structure for Americans doing business in the UK is the partnership. A partnership exists when a group of at least two individuals collectively engage in an activity with the goal of producing a profit. A nominated partner is tasked with registering the business with HMRC and each partner will need to comply with Self-Assessment obligations individually. Income tax is calculated at each partner’s individual tax rate based on their respective share of partnership income, as if they were sole traders.
A partnership agreement is not required but is recommended in all situations, irrespective of personal or family dynamics that may characterise the business relationship. As is the case with sole trader status, no limited liability protection is offered to owners of these traditional partnerships. Moreover, as partners could potentially be responsible for the business debt attributable to other partners, the risk of operating without limited liability here is even greater than it is for sole traders. Those wishing to maintain certain tax and operating features of a partnership while ensuring limited liability from debts of the business may want to consider organising a Limited Liability Partnership (LLP). LLPs are required to register with the Companies House, must submit annual financial reports, and are regulated in a similar way to private limited companies described below. UK Tax Insights - Reporting for a UK partnership arrangement will largely depend on the nationality status of other partners as well as how it is organised in the United Kingdom. For UK tax purposes, if at least one member of the partnership does not have limited liability, the arrangement is treated as a partnership and income and expenses pass through to the partner. If all members have limited liability, the corporate tax rules described below would apply by default, though elective treatment is available to change this status in certain situations. If the partnership is controlled by Americans, each holding at least a 10% interest in the business, annual information reporting on Form 8865 will apply. Americans in control of such an arrangement will be obligated to submit financial statements and other detailed information about the business activity annually. For UK partners in a controlled UK partnership that do not own a greater than 50% interest, this annual reporting may be limited to certain identifying details and transactions with the partnership. A UK owner of at least 10% of a foreign partnership arrangement will need to submit the Form 8865 in the year the ownership interest is acquired, regardless of whether the business is controlled by Americans. WWW.AMERICANINBRITAIN.CO.UK
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