It is important that an appropriate structure is chosen when a US business owner enters the UK market from the US, so as to reduce any potential for double taxation, whether on a personal or business entity level, to the fullest extent possible.
A US citizen is subject to US tax on their worldwide income, subject to the availability of any relief or credits. If a US citizen sets up a business in, or expands their personal or business interests into, the UK then they could also be subject to certain UK taxes on the same income.
In the paragraphs below we aim to flag some high-level UK tax considerations that may be relevant to business owners from the US.
There will, of course, be personal, commercial and operational factors to establishing a business or office in the UK that will influence what structure is eventually chosen.
UK business: entity selection
A critical consideration will be whether to operate any UK business through an entity that is opaque for UK tax purposes, that is, which is a taxable entity, or a transparent entity, such as a partnership, where the profits of the entity are taxable in the hands of the partners.
In the UK, limited companies are opaque. Establishing a UK-resident company may therefore introduce tax leakage when compared with using a tax transparent entity, as the company will be taxed on its profits, and an individual owner will be personally taxed on dividend distributions, salary payments and on disposal of their interest.
Where a business is operated through a partnership, by contrast, the profits will be taxed only once in the hands of the individual, at marginal rates of up to 45 per cent.
A company that is tax resident in the UK is generally subject to UK corporation tax on its worldwide profits, currently at a main rate of 25 per cent (though a lower rate may be applicable to companies with annual profits of less than £250,000).
US citizens will generally be able to claim a 'foreign tax credit' in the US for any UK tax paid on their personal income, which would include distributions from any companies they control.
It is possible to make a 'check the box' election in relation to a UK corporate entity to treat it as tax transparent (disregarded) for US tax purposes.
Once this election has been made a US shareholder should also be able to claim a foreign tax credit in the US for any UK corporation tax paid by the company.
The check the box election can therefore mitigate double taxation that might otherwise arise on any UK business profits.
UK companies must calculate their profits over an accounting period (normally 12 months) and a UK company's accounts date can be aligned with the US tax year end to make US-UK cross border tax compliance easier.
Individual income tax rates are generally higher in the UK than in the US.
