US citizen/ UK resident contracting with US company - more questions...

**SuperLooper** · 22 January 2019, 16:09

I can't comment on your personal US tax liability, but from a business perspective, I've been contracting in the UK through my Ltd for US-based clients for many years and I've never been asked about a US tax classification form.

I invoice my client in US dollars, and they send the money. I have no idea how they account for it at their end.

**jamesbrown** · 22 January 2019, 16:42

The problem you face has nothing to do with contracting in the U.K. per se (notwithstanding your right to do so), but with your U.S. citizenship (and, specifically, the policy of the U.S. to tax you on your worldwide income based on citizenship, rather than residence, and to impose all sorts of reporting hurdles on directors of foreign corporations).

From a U.S. tax perspective, the simplest route is not to have a U.K. company (i.e. to go self-employed instead). Otherwise, you'll want to have your UK company treated as a disregarded entity so that the income is still treated as personal income on your U.S. tax return. There's a deadline for this, I think. You really don't want to get into the labyrinth of Subpart F income. There are various options for reducing U.S. tax, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit.

You might want to shoot WordIsBond a PM, as he's in a similar situation. I work with companies in the U.S. a lot, but I'm not a U.S. citizen, so I face few/none of the issues you describe, which are all related to your citizenship.

More importantly than all of the above, get yourself some professional advice. You note this yourself. However, there is no cheap professional advice (at least, cheap and good). Expect to pay something close to legal fees.

**agridulce** · 22 January 2019, 21:47

Originally posted by jamesbrown View Post

The problem you face has nothing to do with contracting in the U.K. per se (notwithstanding your right to do so), but with your U.S. citizenship (and, specifically, the policy of the U.S. to tax you on your worldwide income based on citizenship, rather than residence, and to impose all sorts of reporting hurdles on directors of foreign corporations).

From a U.S. tax perspective, the simplest route is not to have a U.K. company (i.e. to go self-employed instead). Otherwise, you'll want to have your UK company treated as a disregarded entity so that the income is still treated as personal income on your U.S. tax return. There's a deadline for this, I think. You really don't want to get into the labyrinth of Subpart F income. There are various options for reducing U.S. tax, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit.

You might want to shoot WordIsBond a PM, as he's in a similar situation. I work with companies in the U.S. a lot, but I'm not a U.S. citizen, so I face few/none of the issues you describe, which are all related to your citizenship.

More importantly than all of the above, get yourself some professional advice. You note this yourself. However, there is no cheap professional advice (at least, cheap and good). Expect to pay something close to legal fees.

Thanks, I will try to figure out how to PM him. I'm currently in the process of trying to hunt up an accountant who knows what they are talking about. I've emailed a few that were recommended online, so let's see if that gets me anywhere.

My immediate inclination is to shut down my UK company immediately and then deal with filing the paperwork for the 5 months that it's been live as soon as I find one...

**WordIsBond** · 23 January 2019, 12:14

Not a US citizen, but married one and she's a major shareholder and director in my company, so all this stuff applies to us.

Almost everything I know on this topic is probably in the following threads:
https://www.contractoruk.com/forums/...d-company.html
https://www.contractoruk.com/forums/...acting-uk.html
https://www.contractoruk.com/forums/...count-vat.html

You file an election to be treated as a disregarded entity using IRS FORM 8832. You can set an effective date 75 days before the filing date, so if your company has not had any activity you can go ahead and file the election now, or within a couple of months of beginning trading, and you should be ok.

In some cases, it is best just to go with UK sole trader / US self-employed. Factors in that question would include whether or not you are married (if so, giving your spouse shares in your company is highly tax efficient in the UK), whether you are concerned about liability in your work, how much money you'll be making, and questions like how high your pension contributions will be. (Pension contributions made by a company incur no tax, while pension contributions made by a sole trader are deducted from his taxable income but the funds used to make the contribution do incur National Insurance tax.)

Are you familiar with IR35? Chances are good you'll be outside that, but you ought to be aware of it just in case.

Also, it would be more cost effective to get a Transferwise Borderless Banking business account, if your client is willing to pay into that rather than PayPal. Worth checking.

I learned something new recently about UK pensions for US persons. Most people here in the UK know that if you make pension contributions they attract tax relief, and that when you retire you can take 25% of it as a tax-free lump sum. Generally, the US and UK respect each other's tax relief on pensions, so if you have a company paying into a recognised UK pension scheme / SIPP plan, you can deduct that for US taxes, too. But the US doesn't give the lump sum provision. If you take a whopping tax free lump sum at retirement, it will be tax free in the UK but will incur a whopping tax bill in the US. And of course, payments beyond that are taxable in both the US or UK.

That one isn't a big deal for me because it is my pension, not my wife's, that is going to give the big payout. But if you are a US citizen it will affect you. You can manage it by drawing down the pension, a portion of it tax free and another portion taxable, in a way that manages the varying allowances and tax rates, to get reasonable tax efficiency out of your pension. But it's something you need to be aware of if you are going to have a big UK pension.

Feel free to ask any other questions and if I can answer them I will.

**arby** · 12 February 2019, 13:20

I’m a dual US/UK national resident in the UK for many years. I opened a UK ltd company (with me as the sole director and shareholder) in early 2015. I got an Employer Identification Number for it from the IRS and then filed a request for foreign disregarded entity status which was granted. To make things easier I changed the limited company's tax year to align with the US tax year. The US tax return is simple; many numbers from my UK annual accounts transfer straight into Schedule C. And I file a Form 8858 as well. The foreign earned income exclusion fully applies. It was a remarkably simple process and, touch wood, has created no issues to date.

Last I checked TransferWise would not take incoming payments unless the source account was in the same name as the TW account holder. I’m guessing this is to prevent money laundering? In your circumstances they might be willing to be flexible. Otherwise consider opening a current account with HSBC and then you can also open a USD account. What ever you do don’t change currencies through PayPal; use TransferWise or TorFX. Moneycorp is no longer competitive.

**jamesbrown** · 12 February 2019, 13:33

Originally posted by arby View Post

Last I checked TransferWise would not take incoming payments unless the source account was in the same name as the TW account holder.

Third party business payments into your business account are fine. See 1.5 here:

TransferWise - Send Money Abroad-Customer Agreement - TransferWise.com

1.5 You may only use your TransferWise Account Number (as we provided to you) to receive funds into your TransferWise Account for the following purposes:

Receiving your own salary and/or wages;
Receiving payouts from e-commerce and freelancer platforms;
Receiving payments from family, friends or other people you know for personal purposes; or
Receiving payments from your clients and other third parties for the purpose of business payments.

**WordIsBond** · 12 February 2019, 15:19

Originally posted by jamesbrown View Post

Third party business payments into your business account are fine. See 1.5 here:

Yes, I do it regularly. Arby, do you have their Borderless Banking business account? If so, you should have no issues. If not, you should open one. Most currency brokers want you to wire money to them from a foreign account, often a foreign account in your name. So you need an account in your name in the foreign country and you have to pay a wire fee. Transferwise slashes through all that.

**jamesbrown** · 12 February 2019, 15:53

Originally posted by WordIsBond View Post

Yes, I do it regularly. Arby, do you have their Borderless Banking business account? If so, you should have no issues. If not, you should open one. Most currency brokers want you to wire money to them from a foreign account, often a foreign account in your name. So you need an account in your name in the foreign country and you have to pay a wire fee. Transferwise slashes through all that.

Yup. Cater Allen now charge up to $90 for a simple transfer out, $40 from them and the rest from the intermediary they use. Total rip off.

**arby** · 15 February 2019, 09:56

Thanks for clarifying Transferwise’s policy - I have only used them for personal transaction and wasn’t even aware they offered any business services.

US citizen/ UK resident contracting with US company - more questions...