Tax – Business

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, cross-border 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.

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 self-employment 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.

PRIVATE COMPANY LIMITED BY SHARES OR GUARANTEE (LTD)

Private limited companies are widely popular among UK business owners and are available for both individual owners and group ownership structures. No minimum capital requirement is applicable and limited liability is offered to shareholders, protecting their personal assets from debts of the business. This structure may be desirable for expatriates who do not want the risk of operating without limited liability, but accounting for tax attributes will need to be a crucial part of the decision.

Establishing a private limited company is relatively straightforward and requires that Articles of Association, along with several other documents, be filed upon formation. The business is not obligated to hold meetings, but financial statements must be submitted annually within nine months of the company’s financial year-end. Smaller companies may qualify for simplified reporting and all private limited companies are subject to annual corporate tax filing responsibilities.

Private limited companies are required to have at least one company director who must be a natural person, but it can be the sole shareholder of the company. Shares in a private limited company cannot be offered for sale to the general public and a transfer of shares can only occur through a private agreement of the shareholder.

While the reporting challenges in the UK can be extensive for this structure, material UK tax savings can accrue from optimising salary and dividends. The ability to structure income in this manner for Americans paying tax at the higher and additional rate in the United Kingdom can more than offset the additional costs of compliance and UK challenges.

UK Tax Insights - A UK limited company will be treated as a “controlled foreign corporation” if UK citizens or residents, each owning a 10% or greater interest, collectively own greater than 50% of the company.

Americans with an interest in a UK limited company, classified as a controlled foreign corporation, will be obliged to submit Form 5471 on an annual basis disclosing significant

information about the company including, balance sheets and income statements, detailed information about shareholders, schedules detailing alternate tax calculations, and summaries of previously taxed income, among other obligations.

Prior to the changes in 2017, Americans doing business in the United Kingdom were able to leverage limited company operating structures efficiently, taxed in the UK only on salaries or similar compensation, dividend distributions from the company, and undistributed passive earnings that would be taxable irrespective of whether actually paid out during the year. The result was that Americans actively doing business in the United Kingdom through a limited company could easily avoid unfortunate tax results in the UK by ensuring that the structure was not leveraged as a passive investment vehicle.

The Tax Cut and Jobs Act introduced the Global Intangible Low Taxed Income (GILTI) regime beginning in 2018, creating another layer of taxation for UK shareholders of controlled foreign corporations. The new GILTI rules trigger current taxation for UK shareholders on their respective share of all undistributed income from the company, not just passive income. The amount treated as received under these rules is only reduced by an amount equal to 10% of the book value of the shareholder’s proportionate share of depreciable tangible assets in service in the business, less interest payments made to the shareholder and not reported as income.

To complicate matters, a common strategy for minimising UK tax exposure with sole shareholder or closely-held companies results in corporate level profits being maximised in lieu of salaries of bonuses. When profits are managed in this manner, a significant GILTI inclusion will result on the UK side.

Regulations were eventually adopted establishing a “high-tax” exclusion, creating relief from GILTI exposure in countries where the corporate tax rate is comparable to the rate on the UK side. This is one of multiple strategies for managing GILTI and may not be suitable for all American business owners in the United Kingdom, but the main benefit of this option is the ease of compliance.

This high-tax exclusion may be available when the rate of tax in the foreign country where the corporation is located is at least 90% of the UK corporate tax rate, which is currently set at 21%-18.9%. UK shareholders of UK limited companies currently paying the 19% rate in the United Kingdom just barely qualify to use this GILTI exclusion. With the high-tax exclusion essentially being a moving target and corporate tax rate increases anticipated in both the United States and the United Kingdom, American business owners who have been protected from harsh GILTI treatment by this exclusion will want to stay apprised of any changes.

Separate from this exclusion, numerous planning strategies remain available to American business owners using limited company structures that have the potential to eliminate the harsh results of these rules, including electing to be taxed as a corporate shareholder under IRC §962 or making an election to treat the limited company as a disregarded entity or partnership. Regardless, careful planning is now required in an area that was once manageable outside of some increased hassle when filing the UK tax return.

PUBLIC LIMITED COMPANY (PLC)

Businesses that want the ability to offer shares of the company for sale to the public are required to organise a public limited company. This type of entity is characterised by significant organisation and administrative costs as well as strict formalities around meetings, voting, and other activities of the business enterprise.

UK Tax Insights - Given the large number of shareholders typically associated with public limited company structures, the likelihood of controlled foreign corporation issues arising is very small. The primary concern for Americans invested in this type of company in the United Kingdom will be ensuring that business was not established to produce investment income, thus avoiding the complications experienced by shareholders of Passive Foreign Investment Companies (PFIC).

While private limited companies will be the most common operating structure for expat entrepreneurs and small business owners, the

pros and cons of each structure should be closely analysed. Both UK and UK tax laws, as well as the ongoing costs of compliance and administration, must be factored into the broader decision-making. Ultimately, the analysis will largely come down to balancing UK tax savings against increased compliance challenges in the United States.

Expat Legal Services Group offers unique legal services for American expatriates and foreign nationals with financial interests in the United States. Our firm serves the expat community in the areas of international tax, immigration law, and cross-border business and estate planning leveraging a suite of modern technology solutions. Contact Expat Legal Services Group today at info@expatlegal.com or visit the website at www.expatlegal.com.

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