Contractors' Questions: Can I sole trade for a UK-based American firm?
Contractor’s Question: I'd like to definitively know if I’m able to work on a contract basis in the UK for a firm based in Washington in the USA, as a registered sole trader.
If so, what are the tax implications to be aware of? Am I right in thinking that the client won't need to pay US tax as well as me paying UK tax? Are there other considerations to make?
You can operate the assignment as a UK-registered sole trader. However, you need to be aware that foreign individuals are subject to US tax at a 30% rate on income received from US sources which consists, in your case, of “compensation for, or in expectation of, services performed”. This tax is imposed on the gross amount paid by your client to you. It is generally collected by your client, acting as the withholding agent under Section 1441. A payment is considered to have been made whether it is made directly to you or via a third party for your benefit.
It is possible to mitigate some of the withholding tax. You should complete Form W-8BEN to, firstly, establish you are not a US national; secondly, to state you are the beneficial owner of the expected contract income; and, thirdly, to claim a reduced rate of, or exemption from, withholding as a resident of a foreign country (in your case, UK) with which the USA has an income tax treaty, thereby making you eligible for treaty benefits.
You must give the completed Form W-8BEN to your client who, in turn, deals with the IRS (US Internal Revenue Service) which solely determines the actual amount to be withheld from your invoice(s).
If the assignment proceeds and as you will remain UK tax resident, you may be able to offset the amount of withheld tax against the worldwide liability on your UK tax return. A good UK-based accountant will be able to guide you.
Finally, I presume from your question there is no recruitment agency between you and the client. That’s good, in that nowadays agencies do not want contractual ties with individual sole trader placements. They prefer to have an incorporated intermediary in between, such as an umbrella or a Personal Service Company. Some agencies believe such a contractual chain mitigates their exposure to any subsequent labour and tax law issues, although I am not sure HMRC sees it quite that way!
The expert was Mike Phillips, a director of its international, a consultancy specialising in contractors' tax and financial matters.