Contractors’ Questions: Should I set up a UK or American company as a Brit living in the USA?

Contractor’s Question: I am a British citizen living in working in the USA on a non-resident work visa. In terms of UK tax-paying, I'm classified as living abroad and I pay US taxes with my day job.

I am looking at setting up an online-based consultancy firm for sports coaching and will be registering this company in the UK. However most of my clients will be US-based, even if the business is going to be an online, remote-only service. I know I will have to pay income tax in the UK but could you help me with what this means for paying tax in the US?

Expert’s Answer: As a US tax-resident seeking clients in the US, I am puzzled why you should want to operate through a UK limited company.

The US has worldwide taxing rules, and the US Internal Revenue Service will assess you and seek your tax on all your income, no matter from where it arises.

Tax residency, liability, accounting

As you are not a UK tax resident, unless the income arises in the UK, then you will have no tax liability there.

Perhaps it is because you intend to return to the UK, and continue the business in the UK, that you favour operating through a UK limited company.

Our advice is don't operate through a UK company unless this is your imminent plan.

Otherwise, you will have to account for your taxes, both to HMRC and to the IRS. Plus, sorting out which has precedence will be complicated and expensive for you.

Consider a corporiation and the help of a CPA

Suppose you intend to remain in the US for the foreseeable future. In that case, your life will be easier if you run this business through a US corporation. Setting up a corporation is not expensive and can be done quickly.

A local CPA (Certified Public Accountant) will be able to help you pay the correct amount of tax to the American authorities. If your tax affairs straddle both countries, engaging a CPA will not be recommended, and you will need to engage an accounting professional conversant with the taxes in both countries. But be aware, in this latter situation, you will end up paying taxes at the higher of the two countries' rates, plus those unnecessary complications and expenses previously mentioned.

If you do stick to forming a UK limited company...

Let's assume you do operate your business in the UK. You will have to pay UK corporation tax on your company's profits. As you live in the US, you will almost certainly create a permanent establishment in the US and suffer Federal and State company income tax on your profits. You will have to pay US corporate income tax to the extent that the liability is greater than the UK liability. If it is less, you will not receive repayment.

You must declare any income you draw from the company in the US and pay Federal and State income taxes. Your income in the UK should not be subject to UK tax, as you should be entitled to a Nil Tax (NT) coding notice, which applies both to salary and dividends.

Final thought

In summary, it may not be what you wanted to hear, but our recommendation is that you use a US corporation for your envisaged sports venture, while you are tax resident in the States, as to do anything else will be more complex and costly.

I hope that this answers your question. Good luck with your new business!

The expert was Kevin Austin, managing director of Access Financial.