Non resident with UK Partnership profits

Non UK resident taxpayer with UK partnership income

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Can anyone tell me whether a non resident tax payer will have to pay UK tax on his UK partnership profits? I have the SA800 filed with HMRC, but the partnership also completed a K1 for his US accountants . The box entry for these profits on the K1 gives the US accountants the impression that the profits are only taxed in US( it's seen as self employed income), never in UK. I thought that these would be seen as UK profits( partnership is wholly managed and controlled in UK)  and as non resident, the tax payer will have to be taxed in the UK.

Is my understanding wrong?

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By richard thomas
17th Nov 2022 10:15

Which box entry on the K-1 are you talking about? I would have thought that the partner's share of the partnership's business income would go on Part III box 1, where neither anything in the box nor in the Guide suggests that it doesn't apply to overseas profits.

Are you by chance misinterpreting box 14 - self-employment earnings? I do not know if the Federal Self-employment tax, the US equivalent of Class 4 NICs, exempts foreign profits as Class 4 itself does.

None of this has anything to do with the question whether the partner is liable to pay UK tax - that is a matter of UK tax law to which the answer is almost certainly* yes, as the partnership is regarded as having a PE in the UK which generates the UK profits.

* Almost certainly, because the UK/US DTA may say differently. It is very doubtful that it prevents the UK exercising a right to tax the profits of a UK PE of a US partnership, but at this time of the morning I'm not inclined to examine it without a great deal more coffee.

And what about Pt III box 21 of the K-1 - foreign taxes paid or accrued?

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By 131276
17th Nov 2022 10:54

Thank you Richard for your input.

The box entry is 4a & 4b'Guranteed payments for services' on the K1 and also box 14. There is nothing reported in Box 1' Business Income'. Box 21 is also blank, no foreign taxes paid or accrued.

Now the US accountants response is that the services were rendered by the taxpayer in the USA, to the partnership and are not reportable nor taxable in the UK.

However, I tend to disagree because the partnership is managed and controlled in the UK, and the SA800 is his share of UK profits. There are no mention of any portion of overseas profits on the partnership statement.

Am I correct to think that K1 may show the entry in the wrong box or is it something the Partnership needs to clarify?

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Replying to 131276:
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By richard thomas
17th Nov 2022 15:35

Thanks for the clarification. A person who receives "guaranteed payments for services" is in the UK usually known as a salaried partner. In the US s 707(c) IRC 1986 treats the payment as ordinary income and as a deduction to the partnership, which is why it is shown separately on the K-1 from a share of the partnership's business income.

In the UK such a person is usually treated as an employee (there are special rules for "salaried members" of LLPs). I am struggling a bit with "the SA800 is his share of UK profits", but I assume you mean the allocation to partners section of that form that was given to him. This means that he is treated for UK tax purposes as an equity partner, which seems a little odd.

As Justin has pointed out by analogy (boots and feet) the partnership profits of a US partner are taxed on that partner only if the partnership is treated as a PE of his carrying on a business in the UK through that PE. The SA800 treatment supports that view.

But if he really is a salaried partner then what he received from the partnership is earnings from employment, and they are taxable in the UK only if the services were performed in the UK. The US accountants say they were performed in the US.

It's up to you then to decide what to do. Bear in mind that HMRC will query a discrepancy between the SA800 allocation and the SA100. The problem you might also have is that the US may take the view that the UK has no business taxing US services on a US resident and would (rightly) not give relief for the UK tax under the treaty (and I doubt they would give unilateral relief in those circs, pace Justin: the UK wouldn't vice versa).

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By Justin Bryant
17th Nov 2022 11:48

In case helpful and the boot was on the other foot, this would only be taxable in the US under the DTA business profits article (but DTA relief or unilateral relief would need to be claimed in a SA100).

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By 131276
17th Nov 2022 14:02

Thank you Justin ,very helpful indeed and that would make sense. Okay, that's me back to the drawing board.

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Replying to 131276:
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By Tax Dragon
17th Nov 2022 14:58

Have you understood the boot and foot clause?

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