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Residence Status of US Client on diplomatic visa

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I have a client who has been running a small sole trader business in the UK.  She is from the US and is here with her husband who is a member of the US armed forces.  They are here on diplomatic visas.  Under the SRT and the double taxation treaty with the US I would consider her to be resident in the UK for tax purposes and therefore liable to tax on her sole trader business profits and able to claim the personal allowance.  However, she insists that becuase of her diplomatic status she is not resident in the UK.  If this was the case then presumably she would still be liable to UK tax on her UK business profits but she would not be eligible for the personal allowance.  Can anyone clarify whether her diplomatic status means that she is non-resident in the UK for tax purposes?

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18th Jan 2019 12:15

Ask her to cite her sources for that assumption. To quote HMRC:

"The residence rules apply in the normal way to individuals entitled to diplomatic privilege. An individual who is on the facts resident for tax purposes in the United Kingdom may claim the personal allowance against any non-exempt income."

She may be thinking that her income is exempt, but unless it derives directly from private sources overseas or as income from the diplomatic mission then it is fully liable to UK tax IMO.

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By Bsuere
to Tim Vane
18th Jan 2019 12:25

Thank you. Do you have a link to the source of that quote?

Edit: I've found the source, thank you!

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By gphemy
18th Jan 2019 13:13

Perhaps this source will help (being at one remove from HMRC):
https://www.ibfd.org/sites/ibfd.org/files/content/pdf/Tax%20Rules%20in%2...

See 24.4.1.1.2 (I have edited for emphasis):

The UK taxes from which exemption is given in principle [...] are the direct taxes (income tax, capital gains tax and inheritance tax) and the indirect taxes (stamp duty land tax, stamp duty, value added tax and excise duties).
[...]
private income from sources within the United Kingdom does not rank for diplomatic privilege exemption in any case.

Good luck convincing her!

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18th Jan 2019 14:46

I had a client come here with US Army spouse. Had great difficulty convincing him that the exclusions for US personnel do not apply to their spouses (And that he did not meet the exclusion for civilian contractors on army base)

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18th Jan 2019 15:55

The Diplomatic Privileges Act 1964 exempts accredited diplomatic agents from UK liability, but only for income derived from their diplomatic activity. It doesn't make them non-resident, nor does it exempt non-diplomatic income, such as a UK commercial trade.

I would proceed on the basis that she's taxable in the UK and entitled to a PA, and then let her US tax attorney argue about double tax relief in her US return, since the UK gets first dibs on taxing a UK-based trade of a UK resident. The US levies taxation on its citizens worldwide, but allows a foreign earned income relief or a credit for foreign taxes. Even if she were NR in the UK, she'd presumably still have to tax the income in the US, subject to all their usual rules for deductions and credits.

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18th Jan 2019 16:28

Are you sure that it is diplomatic immunity which applies here, rather than ITEPA 2003, s 303 ?

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to Montrose
20th Jan 2019 16:55

I think ITEPA is irrelevant to a sole trader!

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to thehaggis
20th Jan 2019 20:14

But whether diplomatic immunity or visiting forces exemption applies to husband is in fact immaterial.
The exemption does not apply to the spouse.

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