We spoke with John Bull, Partner, and Head of US/UK Private Clients, and Alex Straight, Partner specialised in US/UK entrepreneurial Clients, at Blick Rothenberg, a market-leading accounting, tax and advisory practice, about the impact of one of the three certainties in life…taxes.
Download PDF VersionAs Americans are taxed on a worldwide basis, many who are employed in the UK are familiar with the dual US and UK reporting required and with ensuring that they avoid double taxation. However, once they set up and run their own businesses, the level of complexity and required reporting very quickly increases. Not only to comply with all the additional UK requirements, such as company accounting, corporate taxes, and VAT, but they also need to worry about their business’s US tax position. All entrepreneurs need to have a good understanding of their numbers and business plans, but for US entrepreneurs, this is crucial to enable tax planning and being able to understand the US tax consequences of the new business.
There are no specific tax advantages for US entrepreneurs in the UK. Many of the UK incentives, such as research and development credits or business asset disposal relief, are one-sided, so the benefit to US taxpayers may be very limited. For certain businesses, the US does allow eligible non-US entities to make a ‘check-the-box’ election to change the US tax treatment from opaque to transparent and vice versa. This can result in some favourable outcomes when it comes to balancing US and UK taxes, but requires planning based on the future business trajectory and strategy to ensure this is beneficial.
For many new entrepreneurs, particularly where previously they may have been on UK PAYE, it is important to understand their business tax structure and ensure sufficient UK tax payments are made in a timely manner to avoid double tax issues. We sometimes see very elaborate business structures put in place with no advice taken by the US entrepreneur shareholder which can result in large tax and annual reporting burdens.
In particular, US entrepreneurs need to ensure they take advice when using UK LLPs and US LLCs. This is because the US and UK tax authorities generally disagree on their tax treatment, seeing them as corporation/partnership and partnership/corporation respectively.
Finally, where there are US entrepreneurs, it is common for questions regarding US tax compliance to come up during a sale due diligence process, which has the potential to derail a business sale or investment.
Brexit has impacted many businesses with international operations where they have had to expand their corporate structures to facilitate easier trading with and in the EU. My corporate tax colleagues have helped many clients with their customs and excise taxes and VAT issues resulting from Brexit. For US entrepreneurs, as corporate structures expand and become more complex to deal with issues caused by Brexit, the level of US tax reporting and planning increases.
The UK corporation tax rate is currently 25%. Therefore, most US entrepreneurs would hope to be unaffected by many of the US tax rules which look to impose US taxes on ‘low taxed’ profits. However, the way US and UK deductions operate can lead to mismatches of taxes which can inadvertently create double tax. A common example is the difference between the US tax depreciation regime and the UK capital allowance rules which can create differences between US and UK calculations of taxable profit and corporation tax.
For a US individual entrepreneur, if possible, it is helpful for their company to have a 31 December year end. This aligns with their personal US tax year and helps make the annual reporting easier. We also avoid PLCs unless there is a commercial reason. This is because UK PLCs are unable to use any ‘check-the-box’ election planning, so are stuck as being opaque corporations for US tax.
There is a comprehensive double tax treaty between the US and the UK that seeks to remove double taxation. However, it is often where there is a difference between the timing or nature of the income and associated tax where we run into problems. The US and UK also have a totalisation agreement for social security that helps avoid having to pay UK national insurance and US self-employment taxes.
Don’t let the tax tail wag the dog!
Starting, running, and growing a successful business is hard. You should structure and run your business in what makes the most commercial sense. Being clear about your business plans means that overlaying the tax advice becomes easier as we know the ultimate goals and commercial drivers of the business, such as where your key stakeholders live and work, where your customers are, and the amount of investment and capital required. This involves various professional advisors working together, if you can surround yourself with the best people, this will allow you to focus on what you are best at, running your business.
As can be seen from the answers above, in the intricate landscape of cross-border entrepreneurship, understanding the nuances of tax regulations is paramount to business success. If you are seeking advice on tax planning, or aiming to avoid the pitfalls of double taxation, please do get in touch, we would be happy to help.
CEO at Cavendish Family Office
