Tag Archives: best tax structure for the U.K.

The United Kingdom Headquarters for your Business

Having a United Kingdom headquarters for your business can save you taxes. With the new tax law,  the U.K. has a special tax advantage. 

United Kingdom claims U.S. LLC is a tax haven company

United Kingdom is beating America as the better business country

With the exit from the European Union, Britain has been able to have its own tax policy.  The U.K. plans to reduce its corporate tax rate from 20% to 17%.   Unlike the U.S., the U.K. does not have a state income tax.  

E-commerce and other cloud-based business have a special tax planning advantage by being in the U.K.   The U.K.’s income tax treaties with Western Europe  and the United States will remain even after the British Exit

Hosting your  Ecommerce business on a computer server in the U.K. can avoid income taxes in Western Europe.

The key is to keep your inventory in the U.K. or to sale web based intangible assets.

For example, if your site is a similar to Travelocity, the site is providing a service (similar to a travel agent).  Service income is sourced where the service provider (you computer server) is located at the time the service is provide.

The same result applies if you are selling a product like an E-book, a video or music or providing a big data service.

In many cases, your U.K. corporation will avoid both  U.S. income taxes and state income taxes.

Here is the best business and tax structure for an Ameican doing business in the United Kingdom.

The first goal of a business structure is to protect the owner’s assets.  At the end of the 1800s, corporations were invented.   Corporations exist only because a government allows them.  Capitalist need corporations to take a limited amount of risk.

The problem for Americans is that we are starting to use limited liability companies.   U.K. courts may not accept an American LLC as an entity that protects the LLC’s owner from the LLC’s debts.

Thus, a corporation is my favorite choice for doing business in the U.K.  If you use an American corporation, you have a choice of being taxed under two different parts of the U.S. tax laws.

In the U.K., you have no choice.  The corporation pays the U.K. tax.  For tax planning, I prefer the U.S. corporation to open a branch in the U.K.

A U.K. Branch allows for large tax saving because of the “foreign tax credit” and the U.K. Tax Treaty.

Your U.S. income tax is reduced by the income tax paid by the corporation to the United Kingdom.  In effect, you get a full refund for the foreign income taxes.

Another choice is to create a U.K. corporation.   The advantage is a deferral of U.S. income taxes on your foreign (U.K. or EU) profits.     However, there is a tax cost.  You will not be allowed the foreign tax credit for the foreign income taxes paid by the U.K. company. `

The other issue of a U.K. company is the cost of filing an IRS information return.  This return is Form 5471.  The Form is complicated because of the many tax saving elections that you can make.    While the cost of this return is about $5,000, the tax savings are in the $10,000s of thousands.

Here is some  more information on international tax law for the American small business.

If you need help in deciding which business entity is best or in preparing the Form 5471, then please, contact me, Brian Dooley, CPA, MBT at [email protected] 

United States Tax Planning for United Kingdom Pay-as-You-Earn Tax (PAYE) or Pay-as-You-Go Tax (PAYG) Payroll Taxes

The blog explains how to avoid the United States 15.3% gross payroll tax on wages paid by U.K. businesses for U.K. residents. 

Both employees and their employers pay social security taxes (a small pension paid by the U.S. government) and tax to fund the U.S. national health insurance (for those over age 65) known as Medicare.[1]

The employee pays half of these two taxes.  The employer pays the other half.

 If you are self-employed, you pay both halves. Each half of the tax is 7.65 percent for a total of over 15 percent paid by the employee and employer. The U.K. does not provide a tax credit for these two taxes.                                                           

Electing to Eliminate the tax with the U.K.-U.S. social security agreement referred to as a “totalization agreement.”

American tax law exempts a U.K. company and U.K. resident when a U.K. resident individual’s earnings are subject to U.K. taxes (or contributions) for similar purposes.[2]

Totalization agreements prevent a duplication of taxes on social security coverage. 

When an individual who is a resident of one country works in the different country,  he or she must pay social security taxes to both countries.

 The agreement  eliminate duplicated taxation under the laws of the United States and the United Kingdom.  For example, Keith is a citizen and a domicile of the United Kingdom.  He owns a U.K. company that is opening a branch in California.  He receives a salary of   ‎£200,000 per year. 

Since Keith spends half his time in California, he pays both U.S. and California income taxes.  

Also, Keith and his U.K. company must pay  ‎£15,300 in  U.S. Social Security taxes and Medicare taxes unless they elect to have the U.K.-U.S. totalization agreement apply.

The totalization the agreement provides that Kieth will continue to be covered under the system of U.K. and is exempt from coverage and taxation in the United States.

By the way, the agreement has rules similar rules for self- employment earnings that are subject to social benefit coverage under the laws of both countries.

Besides the U.K.-U.S. agreement, the United States has totalization agreements  with most Western European countries.

If you need help in opening your business in the United States, then please give me, Brian Dooley, CPA, MBT a call at 949-939-3414 or email me at mailto:[email protected]

FOOTNOTES

[1] Self-employed individuals pay both the employees portion and the employer portions. U.K. residents can elect to avoid this tax.

[2] Section 1401(c) of the code grants a similar exemption from the taxes imposed under the Self-Employment Contributions Act (SEKA). Employees and employers exempted from FICA taxes and self-employed persons exempted from SEKA taxes under the provisions of a totalization agreement are exempted from both the portions of the tax related to retirement, survivors, and disability insurance and the portion related to Medicare.