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US citizen, UK resident, self-employd work in both

Can USA self-employd profit/tax be put on UK tax return when USA allow diff expenses to be claimed?

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Client is a US citizen, obtained spousal visa and became UK tax resident recently (will spend majority of the tax year in the UK etc). Client is an international performer working on a self-employed basis with roughly 70% income dervived in USA, 30% in UK, ad-hoc bits elsewhere.
1) As a US citizen they all have to file a tax return in the USA despite being non-resident, and will need to declare all income/expenses for work performed in the USA on their US taxes (their CPA will deal with filing these).
2) As a UK tax resident they will file a tax return here declaring their worldwide income and get relief for any foreign taxes suffered.

The potential issue, is that what they can claim for expenses in the USA is different to what is allowable for tax here, e.g. round sum per diems (not used to keeping any receipts), more varied expenses than here. But it doesn't seem right that I would need to calculate a 'new' set of accounts from scratch based on which US expenses the UK would allow to be offset against the USA gross income? Should I compile all their worldwide income, worldwide expenses into one set of self-employed accounts, per what the UK says is allowable, expense wise? 

It would seem more sensible to take the net american profit (per the USA accounting rules), USA taxes paid, and use these figures straight from the american tax return (pro-rata'd for relevant years), for the UK tax return, but I am struggling to satisfy myself that this is definitely valid, though it would seem to be the general principle from reading some of the double tax treaty (and getting a bit bogged down)?  
If this is valid, would you just add the US figures to the UK self-employed figures? Or would it be sensible to declare the American business as a separate self-employed business to their UK/Europe self-employed business (though type of work is the same, one agent, one website etc)?

Thanks in advance for any replies.

Replies (16)

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By Matrix
01st Mar 2021 06:42

No this method would not be valid, you would need to compute under UK principles.

You will need to determine who has first taxing rights and in which country you are claiming a foreign tax credit. Article 16 may apply.

If you don’t have the expertise then outsource the work.

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Replying to Matrix:
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By janelm
01st Mar 2021 09:37

Many thanks, I had missed Article 16, but the US income amount will exceed that limit so I think that the USA have first taxing rights on it. I am considering consulting someone (paid) with suitable expertise to advise on this situation (how best to identify someone?) and am also considering declining the work (they are awaiting my quote).

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Replying to janelm:
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By jonharris999
01st Mar 2021 09:56

The problem with Article 16 is "personal activities as such" and the way that relates to work increasingly done online, digitally, recorded....Article 16 dates from having been invented for music and theatre tours.

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Replying to jonharris999:
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By Tax Dragon
01st Mar 2021 11:55

Isn't Article 16 an 'unrelieving' provision? Article 7 says you're taxable on business profits only where you reside (unless you have a PE in the other state), Article 16 excludes entertainers etc from Article 7? [So, thinking about it, given the OP thinks there is a US trade, there is presumably at least a US PE and Article 16 probably doesn't do much here.]

FWIW, "personal activities as such" means "personal activities as an entertainer, musician, or sportsperson." Knowing where your customers are is an issue for anyone selling digitally. Knowing where you were when you produced the content sold is, though, possibly more relevant for direct taxes.

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Replying to janelm:
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By Matrix
01st Mar 2021 22:28

Well you now have 3 possibilities (US has first taxing rights under Article 16, US has first taxing rights under Article 7, UK has first taxing rights under Article 24).

I have a 4th possibility, you haven’t mentioned what vehicle is being used, for example an LLC is treated differently.

If this is one off work I would decline. If you already do other work for the couple and want to keep them then get on the phone with the US adviser.

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By jonharris999
01st Mar 2021 08:11

Based on what you've said (host of other factors might be relevant) this sounds like two businesses, one in each country. DTA is clear on this once you work out where each business is based.

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Replying to jonharris999:
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By Tax Dragon
01st Mar 2021 08:59

jonharris999 wrote:

Based on what you've said...

Which, as you acknowledge, wasn't a lot:

janelm wrote:

type of work is the same, one agent, one website etc

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Replying to Tax Dragon:
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By jonharris999
01st Mar 2021 09:17

Yeah - @janelm, go back a step. Is there a business enterprise in the UK, or is there not? Has client already registered as self-employed in the UK?

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Replying to jonharris999:
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By Tax Dragon
01st Mar 2021 09:35

Does it make any difference (to UK tax) whether she employs herself once globally or once in the UK and again in the US?

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Replying to Tax Dragon:
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By jonharris999
01st Mar 2021 09:48

Yes - "enterprise of a contracting state". Either there is an enterprise or there isn't.

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Replying to jonharris999:
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By Tax Dragon
01st Mar 2021 10:01

You're presumably referring to the treaty, not UK domestic tax law.

In the treaty, the term "enterprise of a Contracting State" is defined as "an enterprise carried on by a resident of a Contracting State."

How is that an answer to my question?

(We have gone off on a tangent anyway - it's not relevant to Article 16. But that was my point - that your point was somewhere between tangential and irrelevant.)

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Replying to jonharris999:
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By janelm
01st Mar 2021 09:42

I advised client needs to apply for an NI number a few days ago, in order to then register as self-employed etc. I assumed as the spousal visa was granted four months ago, the permanent address is now here, and there is UK work taking place that there needs to be a UK business going forwards (appreciate that we need to keep an eye on detailed tax residency rules but they do not expect to spend excessive days in the USA).
Parents are in USA, but US work in varied locations, arranged by an independent agent. No longer has a permanent establishment in USA as perm address now here? I think US have first taxing rights on the US work anyway as the work will exceed the Article 16 income amount.

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By gainsborough
01st Mar 2021 08:48

Assume remittance basis has also been considered if UK resident, non UK domiciled?

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Replying to gainsborough:
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By janelm
01st Mar 2021 09:59

I did consider....but read this too quickly previously. This could be worth considering for six years at least though the annual charge would be completely prohibitive beyond that. I think most of the income will in fact be needed/remitted to the UK - will check. Will read further and consider. Many thanks.

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By David Treitel
01st Mar 2021 21:53

The client is now a UK resident and subject to UK tax & NIC on worldwide profits (and other income and gains) from the date of arrival in the UK.

To the extent there is any State tax payable on income attributable to State workdays the UK will give credit; beyond that there is no credit in the UK for US Federal tax because of the effect of Article 24. The level of expenses is a moot point; the client will pay the higher of UK or US tax; the UK is probably the larger.

Your immediate project is to help the client get a certificate of coverage from HMRC and to help the client budget, so he can pay UK tax to HMRC no later than 31 December each year. An NI Number is ot required to obtain a UTR. the ICAEWs workaround will be of relevance: https://www.icaew.com/insights/tax-news/2020/oct-2020/registering-a-self...

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By Montrose
02nd Mar 2021 19:32

Advice from David Treitel is always worthwhwhile.

As a general point mismatch of allowable expenses is not unusual-very commonly met as an issue is the tax treatment of depreciation of real estate in non UK locations.

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