Strategy & Horizon Scannning
Key tax relief and compliance strategies to help UK companies and individuals avoid double taxation in the US
If a company or individual receives income from a source in one country and is resident in another, they may be subject to tax in both countries – this is known as double taxation.
Double taxation agreements (known as DTA treaties) exist to ensure that income is not unduly taxed twice, reducing overall tax liability and making it possible for companies or individuals to claim a tax credit or exemption for taxes paid in the source country. DTAs also include anti-avoidance provisions that prevent taxpayers from avoiding tax payments, ensuring that income does not go untaxed.
The UK has negotiated tax treaties with more than 100 countries, including the US. These treaties make it possible for a UK resident to claim exemption or partial tax relief from the non-resident country on some types of income, but still require you to apply for relief at source, or to file a claim for repayment.
In this helpful guide to UK double taxation, we will examine some tax relief and compliance strategies UK tax residents can use to ensure a successful tax relief request or repayment claim on tax paid. These arrangements can be useful to employees or business owners who need to operate across borders.
What is a UK Double Tax Agreement, and How Does The US-UK Treaty Work?
The UK-US tax treaty works by establishing agreed principles and mechanisms for taxation on cross-border income, including dividends, interest, royalties, and capital gains.
What this means for UK residents, is that certain types of income you earn in the US are exempt from taxation there, and are instead taxed in the UK, as if you had earned the income domestically. This is because, as a UK resident, you are liable to pay UK income tax on worldwide earnings.
In order to ensure that you are not taxed twice, your tax residence, income source, and permanent establishment will be ascertained. It is then possible to determine which tax you should pay to the US as your income source country, and what you owe to the UK as your country of residence.
It is possible for UK residents to apply for partial or full US income tax exemption under the UK-US double tax treaty, but in order to claim, you will need to provide evidence of your UK tax residency, employment income, UK capital gains and foreign tax obligations, filing the appropriate paperwork and ensuring compliance.
The reality of making a double taxation claim is complex. Tax rates and reporting requirements differ between tax authorities, and it is possible for you to be deemed a tax resident in more than one place, depending on how much time you spend in each country, where you own property and have family, where your company has offices and employees, and various other determining factors.
Paying Income Tax In The UK As A Resident Working Or Trading Abroad
As a UK resident, you are liable on your worldwide income in the UK. You must report all income on your self-assessment tax return, regardless of which country it was earned in. This is because your social security contributions are due in the UK, where you are a tax resident, rather than in the country where you are trading or working.
You can apply to change your residency status and become the resident of a different country if you meet their criteria and follow the proper process, but assuming you remain a UK resident, claiming tax relief requires you to be aware of the rules and stipulations put in place by HMRC.
Establishing UK Tax Residency Status To Ascertain Tax Responsibilities
Depending on how long you have lived in the UK and your personal circumstances, you may need to complete a UK Statutory Residence Test in order to ascertain your UK tax residency status before you can claim double tax relief on US income.
Under the terms of the Statutory Residence Test, UK residency is determined by the number of days you spend in the UK each year, which should be greater than 183, whether you have had a home in the UK for more than 90 days and been resident in it for at least 30 separate days, and if you have been working in the UK for at least 365 days.
Having sufficient ties to the UK is also a factor in determining residency, this is determined through specific ties deemed relevant that are provided alongside the Statutory Residence Test.
It is important to note that you can be technically deemed a tax resident in more than one place, depending on your personal circumstances.
Claiming Tax Relief Under The Double Tax Agreement – UK Resident Advice
To benefit from double tax relief, you must first make a claim for treaty residence via a self-assessment tax return and a specific tax agreement relief claim.
Once your UK residence has been established, the next step is to submit a request for exemption or partial relief on US tax paid using a self-assessment tax return, and a specific tax agreement relief claim.
HMRC will then review the information and evidence you have provided, in order to determine whether you qualify for any tax exemption deduction or credit under the terms of the DTA treaty.
There are three key elements considered when you apply for tax relief under the US-UK DTA treaty:
Residency: If you have been living in the UK for more than 183 days in the current year, you will be considered a UK resident. Other considerations when it comes to residence are covered above.
Source: The source country is where you are generating or deriving income from. The source country may have taxation rights over dividends, interest, royalties and capital gains generated in the US.
Permanent establishment: Your fixed place of business. If your company carries out its US business activities from a permanent establishment that is based in the US, then as your host country, the US is entitled to tax profits generated within its jurisdiction.
Provisions For Tax Relief Under The US-UK Double Taxation Agreement
Every UK resident is required to pay income tax, the amount of foreign tax paid on US earnings can be offset against UK taxes paid, through a variety of potential provisions.
Potential provisions for tax relief under DTA include:
Tax exemption: This method of tax relief allows the source country, in this case the US, to exempt certain types of income from taxation, allowing your country of residence, the UK, to tax your income as if it were earned domestically.
Tax credit: In this scenario, you are subject to UK income tax, but are granted tax credit for taxes paid in the US.
Tax deduction: This allows the UK to deduct taxes paid in the US from your total tax liability.
Alternative Provisions for Tax Relief Where Double Taxation Does Not Apply
Unilateral Tax Relief
Even if you are not eligible for tax relief under the terms of any double taxation agreements, as a UK resident you can still claim unilateral tax relief under domestic tax laws on foreign income already taxed in another jurisdiction. This tax relief is provided in the form of a foreign tax credit for tax paid, and guidance on how to apply for unilateral relief is provided on the HMRC website. The foreign tax credit can reduce your UK tax liability, but you will still need to pay tax in the UK if you are resident here.
Tax Credits
Tax credits allow you to offset foreign tax against your domestic tax liability, so that you are only taxed on the difference between domestic and foreign tax rates. This is dependent on types of income and HMRC guidance on what is allowed to be tax deductible.
Tax Exemptions
It is possible for some types of foreign income to be entirely exempt from taxation, which in some cases can include dividends, interest, royalties, or income earned in specific industries or sectors. Exemptions are different from unilateral relief and in most cases are covered under double tax agreements.
The Bottom Line
While it is possible to apply for relief yourself as a tax resident of the UK, failure to comply with international tax laws, whether due to accidental negligence or intentional avoidance, can result in tax penalties and fines. So what’s your best bet?
Ultimately, you should seek expert advice to guide you as a UK tax resident through the entire process of claiming relief under the US-UK double tax agreement.
