Everfair Tax

Specialists in UK, US and Expatriate Tax.

Conducting Business in the US with an Established UK Business

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Owner Managed Business Series: Transatlantic Moves (US & UK) and the US Tax Impacts

There are numerous reasons why you may consider a transatlantic move – work, love, family. Whatever the driving forces, there are undoubtedly many factors to consider, particularly as a business owner. Business owners must assess both business and personal impacts, especially if operating from both sides of the Atlantic.

The Transatlantic Move: Series Explanation

There are three articles in our Transatlantic move series. This series of articles will consider the tax impacts of moving between the US & UK as a business owner. They will focus on various tax issues and implications for the individual owner and their business. Thereby, highlighting areas of potential adverse and double taxation for business owners looking to make a transatlantic move.

Each article aims to provide an overall awareness and potential impacts of the highlighted tax areas. It is not a comprehensive analysis or specific tax advice. They are based on the tax law in place at the date of the articles.

Each individual situation is unique. You may feel that you potentially fall into the areas discussed within these articles. As such, you are advised to take specialist advice which considers your particular facts and circumstances. At Everfair, our specialist team of US & UK tax advisors work with high-net-worth individuals, trusts, and owner managed businesses. We can advise you in planning your affairs to maximize the tax efficiency on both sides of the Atlantic.

The Transatlantic Move: Series Breakdown

  • The first article examined general areas of consideration for a British business owner moving to the US. It focused solely on their individual tax matters.
  • The second article will focus on moving to the US with an established UK business. It will address various tax issues and implications to the business and its owner.
  • The third article will focus on moving to the UK with an established US business. It will address various tax issues and implications to the business and its owner.

Article 2: Moving to the US with an Established UK Business

The second article in our owner managed business series focuses on moving to the US with an established UK business. It considers the US tax impacts and implications to the business and its owner.

Moving to the US with an existing UK business will require careful thought and planning. The primary purpose and length of your stay will drive how you structure your business in the US & UK. You will want to minimize unnecessary administrative burdens and avoid adverse or double taxation upon your move to the US.

The Transatlantic Move to the US with an Established UK Business: Summary 

This article explores the potential US tax implications when moving to the US with an established UK business. It will cover the following areas:

  • How the business and its owner will be taxed in the US
  • Points to note when setting up a US entity
  • State income and sales tax implications
  • Minimizing double taxation by highlighting certain non-US friendly company structures

US Taxation of an established UK Limited Company and its Owner

The UK limited company is generally the most common vehicle when setting up a business in the UK. The company files separate accounts and tax returns with HMRC. The owner is taxed upon distribution, mainly through salary or dividends. For purposes of this article, we will consider a UK limited company that is owned 100% by a single owner. We will consider the US tax implications of moving to the US with an established UK business for both a:

  • British national business owner moving to the US
  • US citizen, UK resident business owner moving back to the US

British National Business Owner Moving to the US

Upon becoming US tax resident, the British business owner will be subject to US personal income tax reporting. This includes informational reporting in relation to any non-US company interests. The UK company profit may be subject to tax on an annual basis at the owner’s effective ordinary tax rates. This is subject to the extent the UK company has profits sourced outside the US, absent any US tax elections. This is different from the tax treatment reported in the UK which is based on distributions rather than company profit.

The UK company will likely be deemed doing business in the US, especially if the owner is performing services there. It will become subject to its own income and payroll tax reporting and filing requirements. The company will be taxed at the current Federal corporate tax rate of 21%. The company may also be subject to state tax filing and reporting which we will cover later in this article.

US Citizen, UK Resident Business Owner Moving back to the US

US citizens are subject to tax and reporting on a worldwide basis, regardless of where they are living. Therefore, a US citizen business owner living in the UK will have already been subject to annual US tax reporting. They will also have been subject to US tax reporting in relation to their UK company interest. Their reporting obligations will continue upon moving back to the US.

The US citizen business owner may also have made certain US tax elections whilst living in the UK. These elections may have been made to mitigate the potential for double taxation. A discussion of these various elections is beyond the scope of this article. These elections may have been beneficial whilst living in the UK. However, they should be reviewed if they will continue to be tax-efficient whilst living in the US.

The UK company will likely be deemed doing business in the US, especially if the owner is performing services there. It will become subject to its own income and payroll tax reporting and filing requirements. The company will be taxed at the current Federal corporate tax rate of 21%. The company may also be subject to state tax filing and reporting which we will cover later in this article.

Setting up a US Entity

At the onset, it may seem logical to set up a separate US entity upon moving to the US. In many cases, this may be the right decision. However, it is important to consider the situation in whole. A decision to set up a separate US entity should factor in your individual facts and circumstances. This will help determine the type of entity and ownership structure needed in relation to your UK company. In certain cases, it may be determined that a UK entity is no longer needed. In this instance, you may consider winding up your UK company prior to moving to the US.

Some key factors to be considered in the initial analysis include the following:

  • Length and purpose of your stay
  • Where you will conduct business
  • Where your clients are located
  • Short and long-term growth plan of the business
  • The amount of time you will be spending in the US and UK
  • Where your employees will be located
  • Are you looking to attract outside investors?
  • What is the timing and exit strategy?

Other areas to consider include pension and healthcare for yourself, your family, and your employees. You may also want to consider tax planning for retirement.

Dependent on your individual situation, there are a variety of entity options available in the US. Each option has varying levels of reporting, setup, and tax implications. For individuals with a footprint in both the US and UK, the level of reporting will likely increase.

State Tax Considerations

Another important area to consider when moving to the US with an established UK business is state tax. Each state has different rules to determine if you are transacting business (creating nexus) in the state. This can result in additional registration, filing and tax implications, despite having no physical presence in that state.

The two general areas of consideration from a state tax perspective are:

  • Income tax
  • Sales tax

State and Local Income Tax Nexus/Economic Nexus

The first consideration for state and local tax is nexus for income tax purposes. Each state has their own set of criteria and/or revenue thresholds. Certain local jurisdictions such as New York City and the City of San Francisco also have separate thresholds. These thresholds apply to the following:

  • Performing/providing services to clients located and deriving benefit of the services within the state or local jurisdiction
  • Sale of physical or digital products to customers located and deriving benefit within the state or local jurisdiction

Initially, where you live and perform your services may trigger business state registration and filing for income tax purposes. Depending on the state and type of business entity, sales can be sourced to a state based on either:

  • Customer location
  • Where the services are performed

Certain states such as Massachusetts and New York have revenue thresholds which will trigger economic nexus for income tax purposes. The current thresholds in Massachusetts and New York are:

  • Massachusetts – annual sales (on a calendar year basis) greater than $500K.
  • New York – annual sales (on a calendar year basis) greater than $1,138,000.

Not all states operate based on annual revenue thresholds. Income tax nexus can instead be based upon having employees, property, or an office in the state. State corporate income tax rates vary. They can range from zero to 11.5% depending on the state and local jurisdiction. Certain locales such as New York City assess their own local tax to companies and individuals.

State and Local Sales Tax Nexus

Sales tax is a separate class of tax similar to VAT. It can be assessed at a state or local level on certain types of sales and services. The threshold to trigger sales tax can vary but is generally $100K of sales. Once nexus is established, it will require company registration and collection of sales tax from customers. The tax collected is remitted to the state and applicable local jurisdictions by filing sales tax returns.

States are closely monitoring companies that sell or provide services into their state and assessing harsh penalties for non-compliance. Therefore, it is important to review the rules to determine if your business will trigger nexus for sales tax purposes.

Minimizing Double Taxation

A review of the company structure and US tax classification should be conducted in advance of moving to the US. Certain US tax elections may have optimized the tax efficiency for a US citizen living in the UK. However, it may not be tax efficient when living in the US. Therefore, to minimize any potential for double taxation, you should speak with a US tax specialist prior to moving.

Potential Pitfall:  Non-US Friendly Company Structures

In addition, below are two tax traps to be aware of:

1 – UK Investment Company

If either of the following apply, you may be subject to a punitive taxing regime in the US:

  • You own an interest in a UK investment company or
  • Your UK company holds investments or assets which generate passive income such as interest, dividends, or rental income

If either of the above apply, it is advised to consult a US tax specialist prior to your move. This will ensure that any potential areas of double taxation or adverse tax implications are identified and mitigated.

2 – US Limited Liability Corporation (LLC) or S-Corporation

The US LLC is a popular vehicle in the US due to its flexibility and relatively simple set-up. Whilst it is a corporate entity for legal purposes, it is taxed as a transparent entity in the US. It also has minimal initial and annual filing fees compared to incorporation. The income of the LLC is passed through to its owner(s) annually and is reported on their personal tax return(s). The LLC owners can then draw distributions from the LLC tax free up to the amount previously taxed or contributed.

The S-corporation is another hybrid entity that is often utilized by small business owners in the US. S-corporations have certain tax advantages unavailable to an LLC or corporation. Similar to an LLC, it is a corporate entity for legal purposes but is taxed as a transparent entity. The income of the S-corporation passes through to its owner(s) annually and is reported on their personal tax return(s).

Whilst resident in the US, these entities may be tax efficient. However, as a UK resident, it may cause potential double taxation. The UK will tax the owner upon distribution as it views these entities as opaque, corporate bodies. As such, no corresponding credit for taxes previously paid in the US will generally be allowed in the UK.

Also, a change in residency status may trigger an automatic change in the status of the S-corporation. This may carry potential subsequent tax implications.

Therefore, it is important to take US tax advice if either of the below apply:

  • You own an LLC or S-corporation and foresee moving back to the UK after a certain period
  • You own an LLC or S-corporation and may be considered a UK tax resident during your time in the US

This will ensure any potential exposure to adverse or double taxation relating to your LLC or S-corporation is minimized.

Key Takeaway:

The above does not cover every tax consideration when moving to the US with an established UK business. However, it highlights the importance of reviewing your overall company structure with a US tax specialist prior to your move. This will ensure that any potential areas of adverse or double taxation are identified and minimized.

At Everfair, our specialist team of US & UK tax advisors work with high-net-worth individuals, trusts, and owner managed businesses. We can advise you in planning your affairs to maximize the tax efficiency on both sides of the Atlantic. 

Stay tuned for our third and final article in this owner managed business series. The final piece will delve into the tax issues of moving to the UK with an established US business.

Written by Sara Kim

Autumn Statement 2022

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With 2022 seeing record high inflation and the UK heading into recession, today’s Autumn Statement was always going to be a very tricky balancing act for our new PM Rishi Sunak and his Chancellor Jeremy Hunt.

With the previous mini budget resulting in market turmoil, followed by the subsequent reversal of most of the measures. There would understandably be a wish to tread carefully with today’s announcements. It had been confirmed in media rounds, undertaken by the Chancellor in the last few days, that taxes would need to rise to allow the country’s books to be balanced. But, there had been very few clear indications as to in what areas these rises may come and whether they would be direct or indirect taxation.

When the Chancellor finally stood up, the key announcements were as follows:

  • The threshold at which the 45p tax rate becomes payable to will reduce to £125,140 from April 2023. Higher earners can therefore expect to pay £1,200 more a year
  • The annual dividend allowance will fall from £2,000 to £1,000 from April 2023, and to £500 from April 2024
  • Similarly the Capital Gains Tax Annual Exempt Amount will reduce from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.
  • The income tax personal allowance threshold will now be frozen until 2028, rather than 2026 as previously announced
  • Main National Insurance and inheritance tax thresholds will also be frozen for further a two years, until April 2028
  • Previously announced increases in various stamp duty thresholds will now only be temporary and end in March 2025
  • Electric cars will pay road tax from April 2025
  • Energy profits levy rises to 35% from 25% with effect from January 2023 and will apply until March 2028.
  • This levy is also being temporarily extended to electricity companies at a 45% rate
  • In a welcome move to help those with lower income state pension payments and means-tested and disability benefits have also been confirmed to increase by 10.1%, in line with inflation
  • UK national living wage for people over 23 to increase from £9.50 to £10.42 an hour from next April

There was a clear theme that larger companies and those with higher levels of income have the broadest shoulders, and therefore should bear a larger portion of the burden of increased taxes. This is no real surprise, given the way in which the mini budget proposal of abolishing the 45% rate of tax was received. In what is likely to come as a relief to many, the return of capital gains tax rates being linked to income tax rates that had been widely predicted did not come about.

Taxation of Cryptocurrency

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What is cryptocurrency?

Cryptocurrency is a form of digital currency, which can be purchased in a variety of means; from exchange platforms such as Coinbase and Kraken, to some online banking platforms.

With the ever-growing nature of cryptocurrencies there will always be a new form or version of digital currency, such as NFTs. Some of the most well-known are: Bitcoin, Ethereum, Ripple and Luna – which has been hitting headlines for the losses it has created earlier this year.

Income Tax vs Capital Gains Tax

From a taxation perspective, cryptocurrency can be subject to both income and/or capital gains tax. The type of tax depends on the nature of how the income arises.

Both HMRC and the IRS have similar conditions in relation to when income tax is relevant to cryptocurrency.

If cryptocurrency is received as a payment for goods or services or could be considered a trade, under the badges of trade rules in the UK, its likely that it will be treated as self-employment income and liable to income tax rates and relevant national insurance contributions, or social security in the US.

If your cryptocurrency ownership is an investment, as opposed to a trade/earned income, then its likely treatment upon sale will be capital gains tax.

HMRC and the IRS have similar rules in relation to the sale of cryptocurrency outside of a trade/earned income. Capital gains tax will arise if the following disposals are made:

  • Selling cryptocurrency for any government issued currency, i.e. GBP, USD, EUR etc.
  • Trading cryptocurrency for another cryptocurrency or stablecoins; a digital currency pegged to a reserve asset such as GBP or USD
  • Spending cryptocurrency on goods and services, i.e. coffee/lunch
  • Gifting cryptocurrency

What about losses and how I can use them?

For those who have invested in assets/coins such as Luna and have experienced heavy losses, there are ways to utilise these against gains/other income.

The nature of the loss will dictate what it can be offset against, capital losses can be offset against capital gains, trade related losses have specific rules in the US and UK.

In both the US and UK, capital losses can be offset against gains in the same year, in theory reducing these to zero (or up the annual exemption in the UK). For US purposes, it is also possible to offset up to $1,500 against other income sources depending on your filing status and the amount of loss available/nature of loss (passive vs non passive). Any unused losses will generally be carried forward to use against future gains.

For Trade related losses, in the UK/US these are available to offset against other non-trade related income, however the concept of ‘worthless’ stock/shares could impact your ability to claim a loss. Luna as an example is worth practically nothing, but is not worthless, so would need to be sold to realise a loss.

Conclusion 

From both the UK and US tax perspectives, the nature of the transaction will determine whether or not a taxpayer will pay income or capital gains tax.

With the growing emergence of cryptocurrency, both HMRC and the IRS are taking steps to track cryptocurrency to ensure correct reporting.

HMRC now have a data sharing program with all UK exchanges and through this has transaction data dating from 2014 to the present. Letters to investors regarding reporting and payment of taxes is a matter of when rather than if.

The IRS has also enforced that all major exchanges must complete Know Your Customer (KYC) checks. This is as a result of the IRS winning court cases with the likes of Coinbase and Kraken, forcing them to share customer data. Taxpayers and the IRS will also begin receiving 1099 Forms which will indicate income earned and any taxes paid. Exchanges such as Coinbase will send its US customers 1099-MISC forms where there are crypto gains of over $600, and the individual is a US customer.

UK Spring Budget 2022

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The Chancellor Rishi Sunak delivered todays Spring budget under the backdrop of inflation being revealed to have risen to 6.2%. The highest rate of inflation for 30 years. This had been made worse by rising fuel prices and will result in significant increases to the cost of living. There is also recognition of the situation in the Ukraine. The impact the ongoing conflict may have, as well as the relatively slow growth being seen in our own economy. In addition to the need to reduce the level of debt built up during the last two years to fund COVID measures.

Inflation, Growth and Debt Repayments

To make his point, during his statement the Chancellor referenced these cumbersome estimates from the Office for Budget Responsibility on inflation, growth and debt repayments.

  • Inflation forecast to average 7.4% this year
  • UK growth expectation downgraded to 3.8% this year
  • UK to spend £83bn on debt interest in the next year

In line with the relatively low expectations of change ahead of today’s announcement, there were relatively small immediately effective measures to ease the burden of the cost of living were set out. There was however the promise of a 1% cut in income tax rates before the end of the current parliament in 2024 first cut to the basic rate of income tax in 16 years – from 20% to 19% – by the end of Parliament in 2024

Despite the economic picture painted and other indications given in advance as to the limited ability to make sweeping cuts that would have an immediate impact a shout of ‘is that it?!’ could clearly be heard from the Labour benches and there has been disappointment expressed at the fact that the proposed heath and social care level and subsequent NI rate increase were not scrapped as had been hoped for.

What you need to know

Here therefore are the key take aways from today’s Statement:

  • A cut to the basic rate of income tax. From 20% to 19% – by the end of Parliament in 2024
  • Fuel duty will be cut by 5p a litre from 18:00 GMT until March 2023
  • The National Insurance threshold will be raised by £3,000. Meaning people must earn £12,570 per year before paying income tax or NI. It’s a tax cut for 30 million people worth over £330 a year, says Sunak
  • VAT will be scrapped on home energy-saving measures such as insulation, solar panels and heat pumps
  • The Household Support Fund for local councils to help the most vulnerable will be doubled to £1bn from April
  • Retail hospitality and leisure sectors will have a 50% discount in business rates up to £110,000
  • Employment Allowance will increase to £5,000. Claiming it is a tax cut worth up to £1,000 for half a million small businesses.

US Tax Reform Update

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Tax Reform Under The Biden Administration

US tax reform under the Biden administration remains very much a moving target. Therefore, it is something on which we can provide little in the way of definitive guidance.  However, it is perhaps worth a reminder of the current state of affairs, insofar as it might impact US taxpayers living overseas.

It is fair to say that many of the proposals originally put forward have been heavily diluted, or dismissed altogether. There are still some key points worth noting. 

Income Tax Rates

The Biden tax plans proposed an increase in the top rate of Federal income tax from 37% to 39.6%. Reverting to the situation as it was before former President Trump’s tax reforms.  This increase is not included in the bill passed by the House of Representatives.

There were also proposals to increase in the rate of tax applied to long term capital gains, which have not made it into the final bill passed by the House.

For most taxpayers, this means that there will be no significant change to the tax rates applicable to them.

Surtax

Despite the removal of the proposed changes to tax rates, the House bill does contain a provision imposing a 5% surtax levied on an individual’s income in excess of $10m. ($5m for married persons filing separately, $200,000 for an estate or trust.) Plus, an additional 3% on income in excess of $25m. ($12.5m for married persons filing separately, $500,000 for an estate or trust.)

This proposal creates a tax charge, which is unlikely to be offset by credits for foreign taxes paid. Thus, would result in a genuine double-taxation issue.

Foreign Tax Credits

One change included in the House bill, which will be of considerable significance to US taxpayers living overseas, is a proposal to scrap the carryback of excess foreign taxes effective for tax years beginning after December 31, 2022. 

Under current rules, if a taxpayer has paid more foreign tax than they are able to utilise for a tax year, they are able to carry the excess back to the previous year if there is scope to make use of those taxes in that year.

If the bill does pass in a form which contains the withdrawal of the carryback provision, it will mean a renewed focus for US taxpayers overseas to carefully plan the timing of their foreign tax payments to prevent unwanted double taxation problems.

State and Local Tax

The House bill does contain some good news for those subject to State and Local taxes in the US.  Since 2018, the deduction allowed for such taxes for Federal income tax purposes has been limited to $10,000.  The House bill includes an increase in that cap to $80,000 ($40,000 for married persons filing separately).

Net Investment Income Tax

As expected, the 3.8% “Net Investment Income Tax” originally introduced with the Obamacare provisions is to be expanded should the bill get passed in its current state.  The extension of this tax would see it applied to business income for taxpayers whose income exceeds certain thresholds.

Gift and Estate Tax

There had been much talk of changes to the unified credit for gift and estate taxes, which currently stands at $11.7m per person.  It is notable that there is no provision in the House bill which makes any reduction to this amount.

Summary

With the President himself admitting that these tax reforms are unlikely to be passed anytime soon, and with resistance from key Senators, it would be no surprise to see further changes (and, no doubt, delays) to the bill as it makes its way through the Senate and on to Mr Biden’s desk.  This is therefore something to keep an eye on over the coming weeks, and maybe even months.

Written by Matthew Edwards

Managing UK and US Pensions

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Understanding having pension schemes in more than one country.

In recent years, it is increasingly common for executives to have pension schemes in more than one country. Whether that has been from working abroad, or the option to become part of a pension scheme in another country. Therefore, the question often arises when we speak to a client; as to what to do with their pensions from a tax perspective.

Contributions

One of the first questions is often; whether you can get tax relief where you are now resident for contributions into a pension scheme in another country?

Under both the double taxation agreement between the UK and US, and under UK domestic rules, pension contributions to a plan in the other country can qualify for tax relief where you are resident. 

For tax relief to apply, you must have been contributing to the plan prior to becoming resident in the other country. In addition, the plan in question must be a qualifying retirement plan. 

Growth

Under the terms set out in the double taxation agreement between the UK and US, the growth in a qualifying plan in the other country, can’t be taxed where you are resident. Therefore, there is no need to report the annual income and gains received within a pension scheme. Nor the unrealised increase in the value of the assets held in the pension on an annual tax return. The treaty specifically lists IRAs and 401ks as qualifying pension schemes for this purpose.

Withdrawals

As a general rule, under the pensions article of the treaty, withdrawals from a qualifying pension scheme are taxed in the country of residence. This is regardless of where the pension scheme itself is based. However, this rule is subject to the savings clause contained earlier in the treaty. This clause effectively allows the countries to still tax the income on their nationals. Although, they have to provide credit for the tax paid in the country of residence.

It also provides that, where the country in which the pension plan is located would consider something as tax exempt, then it should be considered tax exempt where the person is resident. This would cover situations like the 25% tax free lump sum provided for under UK schemes. As well as the fact that withdrawals from Roth IRAs are tax free in the US. 

This provision is not subject to the savings clause in the treaty mentioned above. It has been the subject of much debate over the years. For example, whether the IRS would allow the 25% lump sum exemption on a distribution from a UK scheme to a US citizen if they are resident outside the US, due to unclear wording of the provision in question. 

Lump Sums

Where a person wants to withdraw their pension as a lump sum, in line with with the double taxation agreement, the pensions article states this is to be taxed where the plan is located. However, it is subject to the savings clause. This allows the country where the person is resident to also tax. This comes with a credit for the tax paid in the country where the plan is located. 

There has been discussion over the years between advisors about the definition of ‘lump sum’ for this purpose. This has included; whether it covers anything but a withdrawal of the whole pot. As well as whether it can still be a lump sum if you have previously drawn on the pension.

Other Charges

As well as the position on distributions, there are additional charges which can arise in respect of a pension. 

In the UK, this includes the lifetime allowance charge. This can apply at certain points when a person has more than their approved lifetime pension fund balance. The fund can vary between just over £1 million and £1.8 million depending on appropriate fixed and individual protections elections which have been made over the years. In the US, there is the 10% early withdrawal penalty if funds are withdrawn from a US pension prior to 59.5%, except in limited qualifying purposes.

The treaty doesn’t specifically provide for what happens with respect to these charges when the person receiving the funds is in the other country. Therefore, that country would normally have a right to tax regular distributions. There is very limited guidance or comment from both the IRS and HMRC. This means that such charges, where applicable, may be in addition to the normal income tax charge arising between the two countries.

Inheritance Tax (IHT) and Estate Tax

From a UK IHT perspective, UK schemes can generally be outside the scope of IHT. However, there is a potential issue with US pension schemes. These may qualify for the same treatment as domestic schemes, if they meet the conditions to be Qualifying Non-UK Pension Scheme (QNUPS) under the relevant regulations. Yet, there is an important difference in the way they are structured when compared to UK schemes.

With UK schemes, there is a non binding letter of wishes. This letter allows the trustees discretion over who they pay the funds to when a pension account holder dies. Although, they are likely to follow the letter of wishes. With the majority of US schemes, there is a binding nomination made as to who will receive the funds. This means the trustees have no discretion at all as to whom they pay the monies to on the account holders death.

This is a crucial difference as it means under UK tax rules, even if the scheme qualifies as a QNUPS, the value of the pension scheme is considered to fall back into the pension account holder’s estate for UK IHT purposes.

If you would like any help with your pension management. Or have any further questions on this topic, please don’t hesitate to contact us.

HMRC’s Top Enquiry Triggers

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Why would HMRC contact or investigate me regarding my tax return filing?

As we head to the end of the year and another UK tax return filing deadline, it is also the period where letters from HMRC may be arriving for taxpayers and their registered agents advising them of HMRC’s intent to conduct a compliance check into the 2019/20 return.

This is because with so many returns being filed in the December and January period, this marks the end of the 12 month window from filing that HMRC usually have to raise questions about a return they receive.

It is worth therefore understanding a few key points, should you receive such a letter. You ought to be aware of the main areas that, in our experience, lead to HMRC opening a compliance check.

What to do when you receive an HMRC Compliance Check Letter?

When you receive a compliance check letter from HMRC, the first step should be to engage with the HMRC Inspector who issued the letter as soon as possible. It will be very important to the successful closure of the enquiry that there is an understanding of what the concerns are which lead to the issue of the letter in the first instance.

Communication with the Inspector and providing clear indications of a wish to assist with the process and provide the required clarifications and additional documentation is also very important both to a prompt end to the enquiry and also to the question of any penalties should it be determined that there is additional tax to pay as there are reductions available in the penalty rules for cooperating fully with the enquiry and prompt provision of requested information.

Some areas of particular focus for HMRC in terms of concern around errors and insufficient tax being paid from our experience are as follows:

Top reasons why HMRC would investigate me regarding my tax return filing?

  • The claiming of foreign tax credits to ensure that these are calculated correctly and allowed under the relevant double taxation agreement or our domestic rules

  • Payment of the correct level of remittance basis charge for the number of years an individual has been resident in the UK

  • Unreported foreign income for those paying tax on the remittance basis

  • Amounts not reported as remittances which should be reported as taxable remittances

    • If your return considers any of these matters it is important to ensure that clear records are kept which can be provided to HMRC in the event of such a check.

    HMRC have also begun to issue what they call one to many letters, affectionately known in the industry as nudge letters, as a first step where they have a specific concern before issuing a formal compliance check.

    These letters ask a client to check their return and ensure they are happy with it in respect to a specific point.

    It may be time well spent therefore if you receive one of these letters to have the return reviewed and write to HMRC as appropriate explaining that the return has been checked and you do not believe it contains any errors with reasons provided. This may prevent a compliance check being issued and therefore prevent stress and professional fees down the line.

    UK Budget 2021 – The Autumn Spending Review

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    Against a backdrop of an increase in the projection for economic growth for next year from 4% to 6.3%, Rishi Sunak delivered today’s Autumn Spending Review.

    True to what was previously outlined, it seems the current Government have made a distinct move towards the Spring Budget where tax policy is announced and the Autumn being more an outline of where public funds will be spent.

    Many key note items had already been trailed in the previous days and weeks including the health and social care levy and change to the dividend tax rate and the property developer tax along with key spending initiatives on infrastructure and health care and the removal of the wage freeze for public sector workers. To help boost jobs and the recovery of the economy there was a freeze in corporation tax confirmed and business rates relief for the next 12 months for specific industries.

    While there was perhaps more to spend than anticipated, there remains a feel of a delay in tax rises rather than a complete reprieve, a when rather than if. There is also a question of why importance is attached to the office for tax simplification if none of its recommendations are to be implemented.

    The Finance Bill will be published on 4 November, and there may still be some surprises in the detail there. Otherwise, is it a case of waiting with anticipation until the March 2022 Budget.

    Client Work | Roald Dahl Story Company & Netflix Acquisition Deal, 2021

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    You might have heard… Netflix recently acquired the iconic Roald Dahl Story Company (RDSC). This is incredibly exciting news. As part of the tax advisory team for RDSC and the wider Dahl family, the team at Everfair Tax were honoured to help bring about this remarkable partnership deal which will help bring some of the world’s most loved stories to current and future fans in creative new ways.

    With family members resident in both the US and the UK – and the wish to devote a significant part of the proceeds of the sale to fund a charitable trust focused on the areas of children’s health, anti-hate and anti-racism – this was a very interesting and exciting project to be a part of.

    It was great to be able to help guide on the tax consequences and ensure that everything was dealt with in the most tax efficient manner. We took into account the tax rules of both countries, the individual needs and wishes of different parts and different generations of the family and aiming to maximise the amount available for charitable work.

    We look forward to continuing to work with the Dahl family and seeing these fantastic stories take on new life with Netflix.

    Moving to the UK – when do you pay tax?

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    When do you pay tax when moving to the UK? Well, not only is it important, but it’s also extremely useful to be aware of your tax responsibilities and the allowances available to you in the UK and your home country. In this article, we briefly overview the rules about when do you pay tax when moving to the UK.

    The UK Statutory Residence Test – The Three Types

    This is where it all starts – identifying whether or not you can become a UK tax resident. It’s determined by what’s called the Statutory Residence Test.

    The UK statutory residence test has three parts:

    • The automatic overseas residence tests
    • The automatic UK residence tests
    • The sufficient ties tests

    If you meet any of the automatic UK resident tests, or are resident in accordance with the sufficient ties, the default position is that you are resident for the whole tax year.

    What are the automatic UK resident tests?

    They look at a combination of physical presence and relevant connections to the UK to determine whether you are considered to be a UK resident.

    Split Year Tax Treatment (of your Split Year Provisions)

    It’s important to bear in mind the UK tax year (running Apr – Apr). In specific circumstances, when you arrive in the UK, you are allowed to divide the UK tax year in which you arrive into two parts.

    A. The part before arrival (non-resident) and;
    B. The part following your arrival (resident)

    These are known as the ‘split year provisions’. They are for those who are arriving in the UK, who are starting to have a home in the UK, starting a full time job in the UK or returning to the UK from working full time overseas.

    Non-residents are only taxed on specific types of UK-source income. Sometimes non-residents are taxed on UK-source capital gains, whereas UK residents are potentially taxable on their worldwide income and their capital gains too.

    What is Domiciled in the UK?

    The extent to which you are required to pay UK tax on income and gains generated outside the UK, entirely depends on what is termed your ‘domicile status’. The concept of domicile is essentially where you consider your permanent or indefinite home to be. This can be:

    The country of your birth, or;

    Where your father considered his permanent or indefinite home to be during your childhood or;

    Somewhere that you build a life and consider home as an adult

    Domicile and Remittance Basis

    If your domicile (the place you consider your permanent home) is not in the UK, then you can potentially claim the remittance basis. Claiming the remittance basis allows you to only pay tax on non-UK income and capital gains, to the extent that it is considered to be “remitted” (ergo received into) to the UK. The remittance basis can be claimed or not claimed each year, that’s your choice and dependent on your preferences and circumstances. It’s important to note that the annual cost of claiming the remittance basis increases, alongside the length of your residence in the UK.

    • < 7 years residence of previous 9 – loss of income tax allowance and capital gains tax exemption
    • 7 years of residence of previous 9 – loss of income tax allowance and capital gains tax exemption, +plus flat fee of £30,000
    • 12 years of residence out of the previous 14 year – loss of income tax allowance and capital gains tax exemption plus flat fee of £60,000
    • After 15 years of residence in the previous 20 years, the remittance basis can no longer be claimed

    For non-UK domiciled individuals (i.e. those who don’t consider UK as their permanent home), the first three years of residence in the UK (including the year of arrival), can also bring an entitlement to tax relief. This tax relief is based on any proportion of salary which relates to the number of days spent working outside the UK. This first three years tax relief also depends on conditions being met, as to where the salary is paid and retaining an appropriate proportion of the salary outside the UK.

    Monies that you had before becoming resident in the UK would be considered tax free. Therefore, to benefit from this and any claim to the remittance basis, it is important to structure your bank account properly. This is something a specialist can help you with.

    Finally, it’s important to know that there is no uplift to market value on arrival in the UK in terms of the basis for assets for UK CGT purposes, if that asset is sold whilst you’re a UK-resident. The entire difference between the original purchase price and sale process would potentially be subject to tax.

    If you have any specific questions about your tax responsibilities, we can answer those for you based on your specific circumstances. We can also work with you on an on-going basis to help you to always prepare well in advance.

    Here are some further useful, reputable UK tax resources for you:

    https://www.gov.uk/tax-come-to-uk
    https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3
    https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm10200
    https://www.rossmartin.co.uk/overseas-residence/2357-split-year-treatment-toolkit