4 minute read.
Liz Zitzow looks at the case of Anson v HMRC on the subject of US/UK tax.
It’s been a few years on since Anson v HMRC back on 1 July 2015. For those who don’t know or recall that case, here’s what happened: Mr Anson owned a limited liability company (LLC) which elected like most LLCs to treat itself as a partnership in the US.
The UK doesn’t recognise this and it results in double taxation despite our lovely US/UK income tax treaty. The tax paid by the individual on his partnership income in the US is not a deductible tax for the corporation’s tax return with HMRC and it’s not useful as a credit against his personal tax on the dividends since it’s for work, not dividends.
The taxpayer fought and won the right to treat his LLC as a partnership. HMRC then came out with Brief 15 (2015) which put so many caveats in the finding that it can only be used as a defence by someone with a nearly identical legal and fiscal structure to their LLC… not too likely!
Where are we now?
An unknown percentage of LLC owners here in the UK have always been filing as partnerships or sole traders (when it’s a single member LLC). My guess off the cuff is that it’s most of them.
They’ve been doing so by reporting their earnings in their LLC to the HMRC as arising from ‘Yankee Doodle’ rather than ‘Yankee Doodle LLC’. Their accountants advise them to shut down the LLC and restructure as something more dual US/UK friendly which ends up costing quite a few bob compared to keeping status quo.
The big change that has happened has been the new US tax laws regarding business expenses. Starting 1 January 2018, businesses deduct business expenses as usual and then they get to effectively double those expenses if they meet certain easy-to-meet criteria. Yay!
However, individuals are no longer are allowed to deduct any business expenses on their personal returns. This has made many Americans convert their cute little side ventures and dinky partnerships first into LLCs and then into S-Corps. What’s an S-Corp? It’s a corporation structure that is taxed on a flow through basis like partnerships and LLCs. S-Corps get lower tax rates than partnerships but end up being higher than regular corporations. Where it saves money is by exempting the dividends from any tax whatsoever. Stateside accountants love these because their fees go up and the taxes go down. No brainer.
Here’s the problem: S-Corps are most definitely a corporation under UK law. You can’t argue that it’s a partnership; it isn’t once it converts to an S-Corp. How is this now a problem for us here in the UK?
Many Americans who move to another country have a spouse. That spouse usually keeps his or her former job as a ‘consultant’ and as ‘consultants’, to get the tax deductions for their little business, they get talked into going S-Corp instead of sole proprietor. Always be on the lookout when you meet a recent immigrant from the US. And if they have an LLC or an S-Corp, have them get rid of it as soon as possible.