Monthly rate spread to account for VAT Monthly rate spread to account for VAT
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  1. #1

    Default Monthly rate spread to account for VAT

    I've just recently moved to the UK from the USA and come to an agreement with my american company to continue on as a contractor. I'm making my way through the process of getting set up as a sole trader with national insurance number and everything. However, I'm getting stumped on how VAT will affect my monthly rate.

    As far as I understand, if I have more then £85,000 in turnover, i have to pay vat on ALL revenue, not just the amount over 85 grand. So am I correct that with regards to my old company in america, i need to either charge them

    less than £7,083 per month
    or
    greater than £7,084 + 20% = £8501 per month

    And anything in between those 2 amounts I would actually be losing money? This seems crazy to me so I'm wondering if I'm missing something crucial here?

  2. #2

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    Your services are considered to be supplied in the U.S.

    See "The General Rule and Place of Belonging": https://www.gov.uk/guidance/vat-how-...ly-of-services

    VAT on exported services to the U.S. is zero-rated: https://www.gov.uk/guidance/vat-expo...g-goods-abroad

    So you should have no VAT on services provided to a U.S. company. I do not think you have to register for VAT, either, I don't think zero-rated revenue counts towards the VAT threshold. An accountant should answer that one for you, or you could simply call HMRC. I wouldn't give them a lot of detail, just say that you are providing zero-rated services to a U.S. company and ask if that has to be counted towards the VAT threshold or not. But maybe one of our accountants on here will clear it up for you.

    You still may gain by registering for VAT, even if you don't have to, because VAT you spend on your business will be recoverable. Accountancy fees and hardware will incur VAT. If you don't have any other real expenses, and aren't spending thousands a year on hardware, it may not be worth it.

    There is a lot you should consider besides VAT. The following questions come to mind.

    1. What about liability? Is there any realistic chance they could take legal action against you if things go pear-shaped? How would you like to be defending a legal action in the U.S. courts, on which your whole financial future depends, while living in the UK? There is benefit to forming a limited company in that it limits your liability.

    2. Further to that, have you looked into Professional Indemnity Insurance? You will find it very hard to find any for a contract that is governed by U.S. law, not so difficult if governed by English (or Scots) law. Again, if liability is of absolutely no concern to you, and if this is your only contract, that probably doesn't matter. But if there is any concern, ask them to sign a contract based on UK law.

    3. Pension contributions. If you save significantly into a pension (comparable to a 401k in America, in case you wondered), it is more advantageous to do so through a limited company. There will be no tax on money paid from your Ltd to your pension plan. As a self-employed person, you'll net out to no income tax on pension contributions you make, but you'll still pay self-employment tax. Based on the figures you've given, this is probably only 2%, however.

    4. Are you married, and if so, does your wife work? If you have an unemployed wife, you should seriously consider incorporation because you can make her a shareholder and a director and save a lot on taxes -- at the level you are earning, you would be able to completely avoid higher rate tax. But, you have to be sure you are outside IR35. That may or may not be problematic -- if you've never been employed by them in this country, the usual Friday to Monday objection probably doesn't apply. I'd guess there is a good chance you should be inside IR35 and a good chance HMRC couldn't prove it if you know what you are doing with your contract.

    5. What are you doing about currency exchange? Are you being paid in dollars or in pounds? Into an account in this country, or in the US? I'm assuming you are a US citizen? If so, you can easily open a US account and they can pay into it, but then currency risk, the cost of the exchange, and any cost associated with the transfer of funds from the US to the UK, is on you. Don't just use one of the UK high street banks to do currency conversions, they'll rob you blind. If you are being paid in dollars (even if they make the payment into your UK bank), you'll want to build into your budget the possibility of the exchange rate going south on you. It's not that long ago that the exchange rate was pushing 2.0, so be aware of what that would do to your budget compared to today's 1.3.

    6. The really, really big question -- does your immigration status allow you to work in this country? I hope you cleared that hurdle....

    7. US taxes. Assuming you are a "US person", you'll have to file every year. If you aren't a US citizen or green card holder, disregard all this, but if you have to file US tax returns:
    A. You file an FBAR every year.
    B. You have to report UK income (this will all count as UK income) on your US tax return.
    C. You can exclude UK income up to around $100K, which may wipe out any UK tax liability. I think it is Form 2555, don't remember for sure. But it complicates other parts of your return and may be the wrong way to go. For instance, taxes on capital gains and/or qualified dividends are complicated enough, but more so if you exclude income using 2555.
    D. Instead of excluding, you can claim the foreign tax credit. This may be much, much better, especially if you have children and can claim the child tax credit -- you basically can't claim the child tax credit, and additional tax credit, if you exclude foreign income, but you can if you use the foreign tax credit to wipe out your tax liability on UK income.
    E. If you incorporate your business, please get US tax advice quickly (like, yesterday) and ask specifically about the advantages and drawbacks of filing the election to treat the corporation as a disregarded entity. If you split shareholding with your wife, you would treat it as a partnership and have to file a partnership return every year, and report it on your own income on 1040 Schedule E. If you don't split shareholding, you would treat it as self-employment, and report it on 1040 Schedule C.
    F. Make sure to opt out of paying U.S. Social Security since you will be living here and under the National Insurance regime. Otherwise, they'll expect you to pay 15.3% of your self-employment income.
    G. Whatever you do, don't buy a UK mutual fund. Just don't. Read up on PFICs if you think this might be ok, and then just don't do it. This doesn't preclude doing it within a pension wrapper, though. There are a few scaremongers out there who will tell you that you shouldn't get funds within a UK pension, either. The tax treaty is pretty clear and no one has ever had a problem with doing this.

    That should be enough to start. If you are a US citizen you are stepping into a bit of a minefield here. You can do really well out of it but you do want to find out where the mines are.

  3. #3

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    Correction to above post: services supplied to the US client are outside the scope of UK VAT, not zero rated.

  4. #4

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    Wow thanks for the lengthy reply, it's a lot to take in so I'm sure I'll keep coming back to reread some of your advice. So you saying that the £85,000 in turnover applies to work done for UK (or possibly EU) clients. That's really interesting and seems to almost re-enforce a bias toward working with international clients rather then local clients.

    Regarding 1-2, I work for a small company that I maintain a very good personal and business relationship with so I'm not too worried.
    3. I honestly haven't thought about that yet, I'm considering just continuing to contribute to my roth ira in the USA for now
    4. Shes employed as a civil servant
    5. They're paying me through transferwise directly into a GBP account. I went through all the work to get an HSBC currency account to find out they have awful exchange rates.
    6. Yes I have my visa
    7. I'm actively looking for a tax person now to help me navigate all this, especially since this year I will have made the full time move and be in a transition year for taxes.

  5. #5

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    Thanks for the correction, TCP. I checked and that is indeed correct.

  6. #6

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    Quote Originally Posted by seanalltogether View Post
    Wow thanks for the lengthy reply, it's a lot to take in so I'm sure I'll keep coming back to reread some of your advice. So you saying that the £85,000 in turnover applies to work done for UK (or possibly EU) clients. That's really interesting and seems to almost re-enforce a bias toward working with international clients rather then local clients.

    Regarding 1-2, I work for a small company that I maintain a very good personal and business relationship with so I'm not too worried.
    3. I honestly haven't thought about that yet, I'm considering just continuing to contribute to my roth ira in the USA for now
    4. Shes employed as a civil servant
    5. They're paying me through transferwise directly into a GBP account. I went through all the work to get an HSBC currency account to find out they have awful exchange rates.
    6. Yes I have my visa
    7. I'm actively looking for a tax person now to help me navigate all this, especially since this year I will have made the full time move and be in a transition year for taxes.
    Re: 1-2, fine. I have a similar situation with one of my clients, a former employer in the US.

    Re: 3, this would probably be a big mistake. Repeat this to yourself over and over for a few minutes: "I do not want to pay 40% tax in the UK, I do not want to pay 40% tax in the UK." You should be able to say that about 20 times a minute or so, do it for three minutes and it should sink in. See below, and adviser should explain why.

    Re: 4, then it probably doesn't make sense for you to incorporate. The savings may not be enough to justify the cost, hassle, and IR35 risk of having a Ltd Co.

    Re: 5, sounds good if they are happy with that. If that changes, you might look into getting accounts with Citibank or Everbank, their FX rates are fairly reasonable, I believe, or used to be. Or, you can be paid into a US bank and wire the funds to a currency broker here to exchange them -- HIFX, Caxton, Moneycorp. But all that is fallback for if your client ever wants to make a change -- there are reasonable options.

    Re: 7, I've read some articles by David Treitel, he seems to know his stuff. I know someone who uses these people: Home - Ingleton Partners. He seems happy but says they are expensive. Here's another one: https://brighttax.com/blog/-us-expat...u-need-to-know. These are not recommendations.

    You might ask on here or a similar forum for recommendations of an adviser: US - UK Taxes. Marrying Americans can be expensive and annoying, but so far I think it is worth it. We paid someone to do it for a couple years but I can't recommend him, so now I do it myself. I probably know everything you need to know, but I'm not volunteering to do yours. Perhaps I could be bought, though.

    If you can't get glowing recommendations from anyone, then call several advisers. Ask them the following questions to find out if they are idiots.

    1) Is there anything I should know about investing in the UK as an American? There is only one acceptable answer: Don't buy any kind of fund investment, either in an ISA or any other way. If they don't tell you that, they are idiots, and go ask someone else. Ask about buying funds within a pension. Nuanced answers here are ok. So is "That should be fine."

    2) What are the advantages and disadvantages of forming a limited company here as opposed to being a sole trader? They should mention lower UK taxes, but also the need to file Form 5471 which is an expensive process. Even the idiots should know those things. If they don't mention the possibility of filing an election to treat it as a disregarded entity, they may just be holding fire until you engage them. But you can ask about that and see if they give an intelligent answer. If they don't know about it or can't sound like they know what they are saying, they are idiots, and find someone else.

    3) If I'm self-employed in the UK, do I have to pay FICA? If they don't say no, but warn you that you have to opt out with the US Social Security people, they are idiots.

    4) Is it possible to claim the additional child tax credit while living in the UK? The right answer is that if you want to do that, you need to use Foreign Tax Credit rather than income exclusion to wipe out your US tax liability. But they should also tell you that to do that you'll have to file a married filing jointly tax return with your wife, and if she isn't a US citizen or green card holder, that may have drawbacks -- you'll have to report her income that you wouldn't have had to report if you filed separately. It still may be worth it. The point is, they should be able to talk intelligently about income exclusion vs foreign tax credit, about the need to file jointly and possible ramifications of that. If they can't, they are idiots.

    5) I'm thinking about just continuing to contribute to my Roth IRA rather than opening a UK pension plan, is this a good idea? There is only one answer to this. No, it's a bad idea. I'll let your non-idiot adviser explain why. If they can't explain why, find a smarter idiot.

    Hope that helps.

  7. #7

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    Again thank you very much for such a detailed post. I got a great referral for a tax specialist this afternoon that used to work for PWC, so I'll see what they have to say on Monday. I will definitely ask about the pension situation. I'm getting an account finalized with Charles Schwab in the US right now for managing my US dollar funds since they are one of the few investment houses willing to work with expats, so I'll investigate what I need to do on this side of the pond as well for GBP funds.

  8. #8

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    Oh, your US investments? I have bad news for you. Read the Catch 22 section of this article. https://thunfinancial.com/american-e...-trap-article/. Read the whole article carefully. Ask your tax adviser about it regarding both UK and US funds.

    You could lobby President Trump to end the insanity of Americans abroad being unable to invest in mutual funds. That's just the kind of regulation he'd like to be out front in getting cleared away. There's got to be a reasonable way they can address this. I don't love the guy but this seems the kind of thing a populist like him just might grab hold of, regulations intended to catch rich cheaters are hammering the ordinary guy who is just trying to save for retirement, etc, etc.

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