Reply to: Dual citizen who works remotely?

[BlasterBates]

I would imagine it is quite common. Particularly in diplomatic circles. Though there could easily be specific rules for this.

I would imagine it is less common in commercial circles. I don't see how it reduces the tax take, it is direct payment of PAYE. Though it might make it potentially more difficult for HMRC to collect, thus they will be reluctant. It is fairly clear from HMRC that they regard it as a last resort.

PAYE75040 - PAYE operation: PAYE direct payment: when to use PAYE direct payment arrangement

It also brings up the question of Employers NI. Where there is a UK employer (e.g. the established branch) then Er's NI will be due. If the employer is non-eu then it may be the case that ER's NI is not due if the employer does not have a taxable presence in the UK.

I agree it may well be simpler to incorporate and bill the us entity, but there is still the question of how that needs to be dealt with by the IRS.

Having done a lot of cross border working, my experience is that tax authorities put any foreign taxed income under the spotlight.

i.e. they'll be wanting to evidence of when he was in the USA how long etc. then if not I imagine all sorts of questions about exactly what he's doing and why is he on the US payroll if he isn't in the US.

I think it is doubtful that they'll simply wave it through. He'll be claiming tax relief via the Double Taxation Agreement, and it means he'll probably be paying far less tax than he would be if he was a UK employee.

I'm not saying it's not legal but you're going to have to be prepared to run the gauntlet.

Diplomats do do this but then you're employed by the US government and this is black and white.

[ASB]

Thank you very much for your help, you've helped immensely and put me on the right track. I'll find a professional and report back; hopefully it'll help someone else who finds themselves in this rare situation

Good luck.

If you search round a few expat fora the question does actually come up quite a bit. Never seem to get any details of what those people actually did in practice though.

[ASB]

Staying on the US payroll is going to be a hard sell with the HMRC. Anyone who pays less tax than they expect gets put under a spotlight.

I would imagine it is quite common. Particularly in diplomatic circles. Though there could easily be specific rules for this.

I would imagine it is less common in commercial circles. I don't see how it reduces the tax take, it is direct payment of PAYE. Though it might make it potentially more difficult for HMRC to collect, thus they will be reluctant. It is fairly clear from HMRC that they regard it as a last resort.

PAYE75040 - PAYE operation: PAYE direct payment: when to use PAYE direct payment arrangement

It also brings up the question of Employers NI. Where there is a UK employer (e.g. the established branch) then Er's NI will be due. If the employer is non-eu then it may be the case that ER's NI is not due if the employer does not have a taxable presence in the UK.

I agree it may well be simpler to incorporate and bill the us entity, but there is still the question of how that needs to be dealt with by the IRS.

[BlasterBates]

I would see an accountant. Since you plan to stay in the UK longterm and your wife will be with you, your main residency will almost certainly be the UK after 6 months, beginning the day you arrived in the UK.

Staying on the US payroll is going to be a hard sell with the HMRC. Anyone who pays less tax than they expect gets put under a spotlight. Battling with a tax authority in a grey area can be a very time consuming and painful process.

I would take advice from an accountant. I think your best bet is to establish a Ltd co and bill the US co directly. This would be the one model that no-one is going to question.

[new2edinburgh]

You're in danger of slipping down the rabbit hole here. There are so many different issues that vary with the structure adopted, mitigating double taxation being only one. There isn't much more I can offer - hopefully it was somewhat useful though. There may be others here with more specialist knowledge, but I would strongly advise you to solicit professional advice and report back

Thank you very much for your help, you've helped immensely and put me on the right track. I'll find a professional and report back; hopefully it'll help someone else who finds themselves in this rare situation

[jamesbrown]

I found this page......

You're in danger of slipping down the rabbit hole here. There are so many different issues that vary with the structure adopted, mitigating double taxation being only one. There isn't much more I can offer - hopefully it was somewhat useful though. There may be others here with more specialist knowledge, but I would strongly advise you to solicit professional advice and report back

[jamesbrown]

I was really hoping this would work. I would rather use an umbrella for at least 3-6 months before possibly switching to something more tax friendly. Having a work contract with an existing company instead of being self employed would make my American wife's visa application a lot smoother (but lets not even get into visa issues, the employment situation is enough complexity for this thread). Does anyone have more information on UK umbrellas that would accept contract work from an American company?

I'd suggest you pose this question in the Umbrella Companies subforum. There are some helpful people around here that should be able to answer this definitively. The important thing is that you avoid any dodgy/offshore solutions. I think a potential difficulty for a UK umbrella is that any employer must consider their IRS reporting and witholding requirements when employing a US citizen. It sounds silly but, in my understanding, even a company without a US presence is required to determine their obligations to withhold and make the necessary payroll arrangements for compliance when employing a US citizen. In practice, this may not mean actual withholding.

Administrative and financial overhead isn't a problem. If I was more bothered about money then I could get a higher paying job in the UK or stay in America. I like working at my tech startup and I want to live in a cool area, overhead on my end isn't really an issue.

Starting a Ltd in the UK and invoicing the US company is definitely an option. It's preferable insofar as you have the protection of limited liability and it should be simpler for the US company to work with. In that case, you will still have some cumbersome reporting requirements with your 1040 to the IRS (search for Subpart F rules; you will also have the usual FACTA and FBAR). Ultimately, you'd be wise to arrange all your filings through a USA-UK tax professional in that case. There are many companies that will sort out your filings in both the US and UK, but it won't be cheap.

Rather than deal with withholdings, couldn't I switch my status from a W-2 to 1099 and file quarterly? I make less than the yearly foreign earned income exclusion.

You're going to be filing in the US regardless, so it really just comes down to how complicated that filing is going to be. It sounds as though this isn't really a major issue for you, as it's basically just a cost (read: get a professional to file for you). If you pay your UK income via PAYE (i.e. it's all earned income) and you're eligible for the FEIE (and I don't see why you wouldn't be), it may be pretty simple (notwithstanding things like subpart F) - but it's just filing time/money, nothing to really worry about, the important thing being compliance.

The last thing I want to do is get my company into any legal trouble. If I quit the job I have as an American and started a Ltd in the UK as a Brit, what would it matter if my British contracting company was hired to do the job that someone (me) had previously just left? Are you saying the company could get in trouble because the British contracting company employs someone who is technically also a US citizen?

It's really the responsibility of your US company to determine what they need to do for compliance (they should take legal advice if they want to keep you). You should focus on choosing an appropriate structure and, given that, what you personally need to do for compliance. You're not going to get into trouble as long as you take professional advice. There is no problem with a UK company employing a US citizen. What I'm less clear about is the withholding and reporting requirements on the US company, but this will depend on the structure you adopt.

And what is this about "self-employment" being interpreted as employment? Are you not allowed to file as a contractor if you regularly work for the same company? When I was first offered my job I was offered to come on as a 1099 contractor. I know engineers who are considered contractors but have worked at the same company for 5+ years. The IR35 rules about "disguised employment" are just about how the workers are taxed, correct? With my situation the IR35 blocks any tax benefit but it doesn't do anything to stop a foreign company from employing a local without creating a taxable entity of their own in that country.

IR35 is something of a red herring here, which is why I didn't focus on that. Yes, it's just a hypothetical test on employment status for tax purposes, nothing more. You'll have to address this in due course if you go with a Ltd. In terms of the risks to your US company of adopting a particular structure, they will need to explore that themselves.

Could I do that? Work from home in the UK but get paid as an American into an American bank and then declare the funds as foreign income when I transfer them to the UK? That would be amazing. You can make voluntary NI contributions so that isn't an issue. I believe I can claim those NI contributions to the US so I don't have to pay Social Security.

The US company will be employing someone in the UK and should be operating UK payroll. In contrast, if you were operating via your own UK Ltd, a UK umbrella, or you were seconded to another company, they would be operating the UK payroll (your contract of employment would remain with the US company in the case of secondment).

What sort of barriers are going to exist for the company?

It depends on the structure you adopt. But if they keep you as an employee? Being a UK employer. Determining their reporting/withholding requirements in the US. Whether they risk creating a permanent establishment in the UK (depending on what you are doing for them). To name a few. I'm not an expert on this by any means - I probably know enough to be dangerous - but I do think a prudent employer in the US will need to think carefully and would generally avoid this scenario. As I mentioned, the tried-and-tested route is a secondment agreement.

[new2edinburgh]

Dual residents

I found this page: INTM154020 - Double taxation agreements: residence: Dual residents. I believe I am considered a dual resident because I have property in both countries, spend time in both, and have about the same amount of family in both countries. I could call the US my "centre of vital interests" because that will be easiest I think.

Double Taxation Relief Manual: Guidance by country: United States of America
DT19850+ - Double Taxation Relief Manual: Guidance by country: United States of America: Contents

DT19865 - Source of income for credit relief purposes
DT19865 - Double Taxation Relief Manual: Guidance by country: United States of America: Source of income for credit relief purposes

For the purposes of the credit Article, income or profits derived by a resident of the United Kingdom which can be taxed in the United States under the provisions of the agreement are deemed to arise in the United States (Article 23(3) of the old agreement and Article 24(5) and (6)(a) of the new Agreement). See, however, DT19851 for the exception where income arises to a United States national who is resident in the United Kingdom.

DT19851 - Scope
DT19851 - Double Taxation Relief Manual: Guidance by country: United States of America: Scope

Article 24(6)(a) [Article 23(3) in the old Agreement] provides that the United Kingdom is not required to give credit for United States tax charged on a United States national who is resident in the United Kingdom in respect of income which he derives from sources outside the United States as determined under United Kingdom laws. Any case where a United States citizen, who is resident in the United Kingdom, claims tax credit relief for United States tax payable in respect of earnings from an employment exercised in the United Kingdom should be referred to CT & VAT, International CT..

The first part says if I'm paid in the US then the income is deemed to have arisen in the US even though I'm a UK resident. The second says that the UK won't provide tax credit for income outside the US (that's fine) and the US won't provide tax credit for anything (also fine). So it looks like I can remain an employee of my US company, claim dual residency, and then the tax I pay in the US will be credited against the tax I'm required to pay in the UK.

NI vs. Social Security will be an issue, but I think I can pay either and credit one against the other.

[new2edinburgh]

A UK umbrella company probably isn't going to be an option for handling payments from a US company (I'm not aware of any that will do this).

I was really hoping this would work. I would rather use an umbrella for at least 3-6 months before possibly switching to something more tax friendly. Having a work contract with an existing company instead of being self employed would make my American wife's visa application a lot smoother (but lets not even get into visa issues, the employment situation is enough complexity for this thread). Does anyone have more information on UK umbrellas that would accept contract work from an American company?

Working through a UK Ltd. is perfectly possible, but you will have significant administrative and financial overheads (e.g. in terms of PI insurance) and you won't have any benefits of employment, of course (for what they would be worth in your scenario, which isn't much). Overall, it won't be an ideal arrangement for you because you're not really a contractor and you would also be taxed punitively in the UK.

Administrative and financial overhead isn't a problem. If I was more bothered about money then I could get a higher paying job in the UK or stay in America. I like working at my tech startup and I want to live in a cool area, overhead on my end isn't really an issue.

With a sole trader/sole proprietor scenario there are always risks of "self-employment" being interpreted as employment, which is exactly what the OP is describing afterall. For payments direct to US citizens/residents overseas, there are regulations governing documentation of status and reporting (W-9 for US persons/W-8BEN for non-US persons) and, in my understanding, severe liabilities on the employer for failing to do so. In contrast, foreign source income paid to a non-US person is not subject to reporting or withholding requirements.

The last thing I want to do is get my company into any legal trouble. If I quit the job I have as an American and started a Ltd in the UK as a Brit, what would it matter if my British contracting company was hired to do the job that someone (me) had previously just left? Are you saying the company could get in trouble because the British contracting company employs someone who is technically also a US citizen? And what is this about "self-employment" being interpreted as employment? Are you not allowed to file as a contractor if you regularly work for the same company? When I was first offered my job I was offered to come on as a 1099 contractor. I know engineers who are considered contractors but have worked at the same company for 5+ years. The IR35 rules about "disguised employment" are just about how the workers are taxed, correct? With my situation the IR35 blocks any tax benefit but it doesn't do anything to stop a foreign company from employing a local without creating a taxable entity of their own in that country.

If the US doesn't have a taxable presence then the OP is at liberty to declare on the foreign income section, claim reliefs for tax deducted by US where allowable, and then has a bit of an NI nightmare to sort out.

Could I do that? Work from home in the UK but get paid as an American into an American bank and then declare the funds as foreign income when I transfer them to the UK? That would be amazing. You can make voluntary NI contributions so that isn't an issue. I believe I can claim those NI contributions to the US so I don't have to pay Social Security.

The US operates taxation based on citizenship as well as residency and, from an individual income tax perspective, this is where some of the headaches will come for the OP (again, though, I think the major barrier is from the perspective of the US company, not the OP).

What sort of barriers are going to exist for the company?

I would strongly recommend that the OP solicit professional advice because it's a very complicated area. Subsequently, it would be great if the OP could report back for the benefit of others.

That's what I'm starting to realize from this thread. Any recommendations for people/firms in the UK? I don't know anything about this subject but I'll be sure to report back what I learn.

[jamesbrown]

Yes, for the OP, this is going to be less problematic from a SA/personal tax perspective in the UK than for the US company or from the perspective of their US individual income tax reporting requirements in the US (i.e. the IRS 1040). The last two will cause headaches in my opinion, the former likely prohibitively so (note that there would also be major headaches, in terms of 1040 requirements, if the OP opened a company in the UK). The US operates taxation based on citizenship as well as residency and, from an individual income tax perspective, this is where some of the headaches will come for the OP (again, though, I think the major barrier is from the perspective of the US company, not the OP). The OP would be filing personal tax returns both in the US (on worldwide income) and the UK (on worldwide income). The US return would likely benefit from the Foreign Earned Income Exclusion on earned income. Taxation of dividends is a different issue. In general, tax-free vehicles in the UK are not treated as such in the US. There are many other small headaches. On the whole, though, if the OP is being paid through PAYE in the UK, the risk of double taxation should be largely or fully mitigated.

Edit: and cashflow could also be an issue depending on US backup withholding requirements, even if things ultimately come out in the wash.

[ASB]

I would strongly recommend that the OP solicit professional advice because it's a very complicated area. Subsequently, it would be great if the OP could report back for the benefit of others.

Agreed, and with most of the other stuff too :-)

Where I was coming from is:-

1) The OP is already an employee of the US company.
2) He intends that this will continue.
3) He intends to work remotely from the UK.

You have made entirely valid points about his status in the US and the complexity of those affairs.

If the above happens, that gives the problem of how the income is handled in the UK.

As I understand it the foreign pages of the tax return cover all overseas income - whether it is employment income or otherwise.

If the US co has a taxable presence in the UK then they must operate a UK payroll (which gives considerations as to ER's NI of course); but in this circumstance it is not foreign income any more and should be declared on the regular pages of tax return.

If the US doesn't have a taxable presence then the OP is at liberty to declare on the foreign income section, claim reliefs for tax deducted by US where allowable, and then has a bit of an NI nightmare to sort out.

[Just pondering, wonder whether he could potentially be taxed on a remittance basis as not ordinarily resident/non dom and whether the remittance basis charge would apply and whether it could be cost effective]

[jamesbrown]

Can you point to any guidance that states that? I agree that HMRC would like an overseas employer to operate PAYE for UK based employees, but they cannot necessarily force that in all cases.

I am NOT saying they can just pay them gross (i.e. no deductions anywhere) and be done with it. I was saying that in the absence of a taxable presence in the UK (which may or may not be the case for the actual employer) then declaring the income through an SA return is an option.

I was saying they are not mandated to have a UK branch or presence, or operate a UK payroll in order to have an employee who is physically located in the UK.

For example here is some guidance for UK based employees of an overseas company which does not have a UK presence (yes it concentrates on diplomatic staff but covers other possibilities). This is for NI of course.

National Insurance for people in the UK working where there is no employer in the UK

And some areas of taxation.

PAYE81500 - PAYE operation: international employments: contents
PAYE81610 - PAYE operation: international employments: employers ?presence in UK?
PAYE75040 - PAYE operation: PAYE direct payment: when to use PAYE direct payment arrangement

Thus it is possible for there to be no employer for PAYE purposes.

Doesn't make the tax due go away of course.

Edit: tax either in the US or UK of course. Some credit for US taxes would be obtained through the DTA.

Declaring the income through a SA is the responsibility of the UK tax payer in a self-employed scenario and this is perfectly fine, of course. However, let's not overlook the issue of unlimited liability when working on a self-employed basis and the litigious nature of the US market (hence the extreme costs of PI insurance, for example), which makes a self-employed status highly unattractive IMHO.

I think the main issue, from a compliance perspective, is not with the OP but with the US company and this is a complex area, with implications both in the US and the UK. In other words, if the US company is sensible, they probably will not want to work through this minefield in practice. The ordinary solution would be to have a secondment to a UK branch of the same company, in which case there are no issues. Otherwise, there are withholding and reporting requirements in the US. For example, US employers are required to withhold income taxes on wages paid to US citizens even if the income is foreign source. With a sole trader/sole proprietor scenario there are always risks of "self-employment" being interpreted as employment, which is exactly what the OP is describing afterall. For payments direct to US citizens/residents overseas, there are regulations governing documentation of status and reporting (W-9 for US persons/W-8BEN for non-US persons) and, in my understanding, severe liabilities on the employer for failing to do so. In contrast, foreign source income paid to a non-US person is not subject to reporting or withholding requirements.

Bottom line, I'm just coming at this from the perspective of an experienced lay person. I work with US clients regularly, and I'm not aware of any that would get into the sort of arrangement that you're describing (quite apart from the negatives from the OPs perspective of having unlimited liability). I would strongly recommend that the OP solicit professional advice because it's a very complicated area. Subsequently, it would be great if the OP could report back for the benefit of others.

[ASB]

If it wants to pay an employee in the UK, the relevant requirements are to have a UK payroll. More importantly, the OP does not want unlimited liability when things go pear-shaped, especially with a US company involved.

Can you point to any guidance that states that? I agree that HMRC would like an overseas employer to operate PAYE for UK based employees, but they cannot necessarily force that in all cases.

I am NOT saying they can just pay them gross (i.e. no deductions anywhere) and be done with it. I was saying that in the absence of a taxable presence in the UK (which may or may not be the case for the actual employer) then declaring the income through an SA return is an option.

I was saying they are not mandated to have a UK branch or presence, or operate a UK payroll in order to have an employee who is physically located in the UK.

For example here is some guidance for UK based employees of an overseas company which does not have a UK presence (yes it concentrates on diplomatic staff but covers other possibilities). This is for NI of course.

National Insurance for people in the UK working where there is no employer in the UK

And some areas of taxation.

PAYE81500 - PAYE operation: international employments: contents
PAYE81610 - PAYE operation: international employments: employers ?presence in UK?
PAYE75040 - PAYE operation: PAYE direct payment: when to use PAYE direct payment arrangement

Thus it is possible for there to be no employer for PAYE purposes.

Doesn't make the tax due go away of course.

Edit: tax either in the US or UK of course. Some credit for US taxes would be obtained through the DTA.

[jamesbrown]

Why not just declare the us income on the appropriate part of your uk tax return?

This isn't a problem concerning how to pay tax in the UK, it's about the appropriate structure to work for the US company given that the OP is an employee but the US company does not have a UK presence and payroll.

Provided the us co is paying you in accordance with their regs why should they give a flying fig about what happens in the uk?

Whether the US company realizes it or not, they don't want to get into a situation where they have a UK employee without a UK payroll. A US company that takes legal advice (and they may not) won't touch it. They cannot just pay out a gross salary to the OPs personal bank account in the US or UK and forget about it because they are an employer with an employee in the UK, subject to UK deductions.

Whether you are rsesident for taxes in the us is dependant upon the facts of your case, though I would imagine there is no escape from federal taxes.

Residency status aside, a US citizen pays tax on their worldwide income. However, US citizens are generally eligible for a Foreign Earned Income Exclusion, which greatly simplifies reporting, and potentially also allows for the deduction of certain foreign housing costs (IIRC). The issue of mitigating double taxation is, again, not the main issue here.

I dont see why the company should be forced to establish a branch and/or payroll in the uk. Unless it wants to.

If it wants to pay an employee in the UK, the relevant requirements are to have a UK payroll. More importantly, the OP does not want unlimited liability when things go pear-shaped, especially with a US company involved.

[ASB]

Why not just declare the us income on the appropriate part of your uk tax return?

Provided the us co is paying you in accordance with their regs why should they give a flying fig about what happens in the uk?

Whether you are rsesident for taxes in the us is dependant upon the facts of your case, though I would imagine there is no escape from federal taxes.

I dont see why the company should be forced to establish a branch and/or payroll in the uk. Unless it wants to.

There is a load of guidance on the hmrc website for employees of foreign companies.