Why has your US customer taken 30% tax from your invoice?

Imagine this. You are a UK business owner, you do some work for a US customer, you send them an invoice for $10,000, and then only $7,000 lands in your bank account.

 The missing $3,000 has not vanished. Your US customer may have withheld 30% and paid it over to the IRS.

 This can feel deeply unfair, especially when you still need to report the full income in your UK accounts or self assessment tax return. The problem is that many UK businesses only discover this after the money has already been withheld.

 The bigger question is this, was the 30% withholding even necessary in the first place?

 The simple example that causes a lot of confusion

 Let us say you invoice a US company $10,000 for consulting work. They withhold $3,000 and pay you $7,000.

 From a UK tax point of view, you may still need to show the full $10,000 as income, converted into pounds. The $3,000 withheld may then need to be shown as foreign tax suffered, depending on the facts.

 This is where people panic. They think, “I have already paid tax in America, why am I paying tax again in the UK?”

 The answer depends on whether the US tax was correctly withheld, whether a tax treaty position applies, and how the income is reported in your UK tax return or company accounts.

For example, if a UK limited company made $10,000 of profit and the UK corporation tax bill was lower than the US tax withheld, you could end up with a messy and inefficient position. You may have paid more to the IRS than was needed, while still having UK compliance work to deal with.

 Could the US withholding have been avoided?

In many cases, the answer may be yes.

The US and UK have a tax treaty. This can sometimes allow a UK person or UK company to reduce or remove US withholding tax, provided the right forms are completed and given to the US customer before payment is made.

This is the part many people miss.

The paperwork often needs to be handled before the US customer pays you. Once the money has already been withheld, fixing it can become much harder, slower and more frustrating.

Think of it like airport security. If you have the right documents before you arrive, things move smoothly. If you turn up without them, you may still get through, but it takes longer and everyone becomes slightly irritated.

Do not forget VAT

 US tax is not the only issue.
 
UK VAT can also cause confusion, especially when selling services, digital products, online courses, templates, downloads or other products through platforms such as Shopify, Etsy or your own website.

A UK business selling services to a US business may have a different VAT answer from a UK business selling services to a private individual in the US.

Digital products can be even more complicated.

The danger is that you do not charge VAT when you should have done. HMRC may then ask you for VAT that you never collected from the customer. That means the cost comes out of your own pocket.

The real lesson

The painful part is not always the tax itself. It is the surprise.

A UK business owner can lose 30% to US withholding, misunderstand the UK reporting position, forget to claim credit where available, miss treaty paperwork, and then get confused by VAT rules.

That is why cross border tax should be looked at before the first invoice is sent, not after the money has been reduced.

Next steps
 
Before working with a US customer, check whether US withholding tax may apply.
Ask whether you need to provide US tax forms before payment is made.
 
Review how the income will be shown in your UK accounts or tax return.
 
Consider whether UK VAT applies, especially if you sell to consumers or provide digital products.
 
Get advice before the invoice is paid, because prevention is usually easier than trying to recover tax later.
 
Simon Misiewicz of Optimise Accountants
US UK Cross Border Tax Options

US UK Cross Border Taxes: https://internationaltaxesadvice.com/
Book a Call: https://optimiseaccountantsltd.as.me/International-tax
US UK Expats Tax Free eBook: https://survey.zohopublic.com/zs/fCDggd
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LinkedIn Articles: https://www.linkedin.com/in/simon-misiewicz-fcca-att-ea-caa-mba-61637033b/recent-activity/articles/

A quick mention of our proud sponsor Calm Buddies, helping children, parents and families bring a little more comfort, calm and reassurance into everyday life. You can find out more about their products here: https://calmbuddiesofficial.myshopify.com/

#USTax #UKTax #CrossBorderTax #USUKTax #Expats #UKBusiness #InternationalTax #TaxPlanning #OptimiseAccountants

Transcript

SPEAKER_00 0:00

You're working with a US customer and they've just withheld 30% tax from you. What do you do now? So I work with a lot of British clients that are providing products or services to their US customers. And sometimes, just sometimes, they come across this issue whereby they are facing this point of 30% tax withholding. We need to understand why that is the case. So when you have an American customer and you're providing products or services to them, and you're based in the United Kingdom, for instance, then they will be told by the Internal Revenue Service, the IRS, and indeed their CPA, their certified public accountant, that they need to withhold taxes for the money that they send to you. So let's imagine that you've done $10,000 worth of work. They will hold back 30% taxes from that, give you $7,000 and then pay $3,000 to the IRS, who will be rubbing their hands together because it's really money that they should not have received in the first place. Let's break this down. So you've invoiced $10,000, but you've now lost $3,000 to the IRS. That $7,000 that you've got left, you will put through your personal self-assessment or indeed your limited company account, and now you're going to face another tax charge. The danger there is, well, hold on a minute, I've just been taxed 30%. So that $3,000 has gone somewhere to the IRS, namely. So what do I do in my UK tax return? Well, that would be a tax credit. So you could say, well, I've got $10,000, and I appreciate we'd have to convert that into pounds. But for simplicity of this episode, I'm just going to be talking about dollars. That 10,000 would be income, and that'll be shown on the top line as turnover. And then you would have somewhere in your tax compensation, tax withheld 3,000. And when you look at your personal tax return, let's imagine that you are using a company structure and you're taxed at 19%, therefore $10,000. And again, let's just ignore the pounds for a second. But you might have then a tax bill of $1,900, but you've already suffered $3,000. So now you've lost and you shouldn't have a UK tax liability. That's a lot of detail. I apologize. But you do you cannot forget that you've paid this US tax. Now you could argue right from the bat, if you're using a UK limited company, that you are paying more tax to the Americans than in the UK to HMRC because of the 19% tax rate versus the 30%. This episode is proudly sponsored by Calm Buddies, created by Louise and me to help care for anxious dogs inspired by our very own dog, Dolce. Please visit our Shopify store using the links provided below to see products designed to support dogs with anxiousness around separation, fireworks, and loud noises. Calm Buddies, better days together. There is a simple solution here. You could easily say to your customer in the US, Well, hey, I'm relying upon the US-UK tax treaty. And using the appropriate US tax forms, you can say to them, Well, hey, here's a form. I don't want you to be withholding any US taxes from me whatsoever. So now your US customer can receive that form that you've sent and say, oh perfect. What I will do instead is send you that $10,000 straight into your account. I will not do any US withholding at all. So that $3,000 now gone. You are going to be paid the full $10,000 into your bank account for the services rendered or products sold. Now, of course, that does still mean that if we're using the UK limits company analogy, that you will still pay corporation tax. And again, assuming nine you've got no cost at all, which likely that when does that ever happen? But let's imagine you had no cost at all, then at $10,000 worth you'd be taxed equivalent in pounds 19%. So you still have a 1900 tax bill to pay. But thankfully, you're not overpaying tax to the United States, in particular the Internal Revenue Service. So it's really important before you get started in business, knowing the tax system in the US and getting all the appropriate forms and understanding in place to ensure that you do not overpay tax in the United States or indeed the United Kingdom. Now we also have to think about other types of tax as well. And one of the taxes that are often mislaid really is around VAT. Now I'm going to focus on just services for now because products is a whole new ball game as well. So I'll just talk about services for now. If you are in the United Kingdom and you've got a business customer in the United States, then actually the VAT rate is exempt. You zero rate. You don't have to pay charge VAT, they don't need to claim back VAT, and you do not need to charge VAT. Now the tricky part will come is if you've got customers. I'm not talking about business people, I'm talking about the everyday Joe that you're providing products or services to. And again, I'm going to just focus on services just to make my life easier. But if you're providing services to the Joe public, then you may have to charge VAT because you're rendering your services from the United Kingdom and they are a customer in the United States. So there are different rules around that in terms of where the customer is based versus where the supplier is based. In this scenario, you are the supplier providing service to a customer, and therefore you might have to charge VAT. Digital services, well boy, don't get me started on that because again, there are rules and regulations around VAT of selling digital products. So if you're an Etsy, you're selling products on Shopify or anything like that, and it's a digital product as opposed to a physical product, then you need to understand the VAT rules around that and think about well, should I charge that? If you don't charge it, and you should have done, HMRC will be knocking on your door to ask you, well, where is that money for VAT? And since you've not claimed it off your customers, we're now going to claim it off you. So there are things you need to think about from a US tax perspective as well as a UK tax perspective. And unfortunately, I do see a lot of problems where people don't understand the tax position and then get hit by both the IRS in the United States and by HMRC in the United Kingdom. Don't let that be you.