IRS Trap, Sending UK Employees to the US Could Financially Ruin Your Business

A UK employee flies to the United States for a few business meetings. Simple, harmless, low risk, surely?

Not always.

In today’s episode, Simon Misiewicz of Optimise Accountants explores the dangerous grey area between a straightforward US business visit and a situation that could create serious visa, tax, payroll, insurance and HR problems for UK businesses.

We look at when a short trip to the United States may be low risk, such as a UK employee attending internal meetings, meeting colleagues, putting faces to names and having no direct involvement with US customers, contracts or billable work.

We then move into the much more serious scenario, a UK employee being sent to the United States for several months, working with clients, supporting an IT system, developing solutions, helping the US group company and contributing to customer income.

This is where the questions begin.

Is the employee still simply visiting America, or are they working there? Could a B1 visa still be appropriate, or should proper immigration advice be taken? Could the IRS argue that the employee has US taxable income because they are physically carrying out work on US soil? Could the UK business create permanent establishment concerns? Could the employee become exposed to US tax residency, worldwide income reporting, bank account disclosures, investment reporting and pension reporting?

Simon also discusses why employers must think beyond tax. Insurance, travel cover, payroll, social security, the UK US totalisation agreement, HR policies and internal procedures all need to be reviewed before sending UK staff to America.

This episode is essential listening for UK business owners, finance directors, HR teams, accountants, expats and globally mobile employees who want to avoid expensive surprises when crossing the Atlantic for work.

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Simon Misiewicz of Optimise Accountants

US-UK Cross Border Tax Options

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Transcript

SPEAKER_00 0:00

So, do you have a legal problem or do you have a tax problem when going to the United States? So I've just got off a call with a potential client, and we're talking about doing some business in the United States. And this could be very much an example of a business in the UK that's sending an employee to the United States for a couple of meetings. Now, are there any genuine issues regarding visa or for tax? And it really does depend. I know that's a typical saying you hear a lot of accountants talk about. It depends. It's a real sad answer, but it's a very true one. And let's go through an example. If you have a staff member that is just happens to be in the United Kingdom and going over to the United States to meet and greet a few US employees that's working part of the group, and it's only for three, four days, then there shouldn't really be any issue at all from a visa perspective or indeed a tax perspective. And why is that? Well, let's think about it from a legal perspective first before we go into tax. From a legal perspective, you may have an ester or a B1. Now, a B1 visa is probably the best way to go. Now you send an employee over, they're not going to be doing some physical work. So direct to clients, direct to customers. They're not going to be servicing them, they're not going to be advising them, they're not going to be meeting and having meetings with them. All they're going to be doing is having an internal meeting to meet and greet some staff members. They're not really producing anything. There's no outcome to those sessions other than to put faces to names and to have a conversation about what each other does. From a tax perspective, is there any issues? Again, it goes back to well, what are they doing? We've already decided here in this example that there is no involvement with the customer. They're not signing contracts, they're not producing goods or services to the end client or customer. So therefore, there's no tax problems either. So in that isolated case for this particular person, this is all fine. They could go to the US and there's going to be no tax or legal ramifications. But it can be tricky when you start to say to someone, hey, I've got an employee and this US business needs some help, part of the same group. And what we're going to do is give them a six-month assignment. And part of that work could be, for example, dealing with customers directly. So it could be an IT system, they're going over there, they're doing some tests with the system, doing some development, working with a particular customer and client, and that client is then going to be paying their money, not the employee, the business. So where do we stand with this one? Well, from a visa perspective, they're now doing work with the business. They're producing something, aren't they? Because they're giving that client a solution. That is something that really the embassy may say, well, hold on, you can't just have a visitor coming to the United States and clearly there's billable hours going on here and they are producing something for the customer. This is not right, having just a B1 visa. We need to have them on a proper work visa. And that's going to be limited, by the way. So you do need some real good expertise around this. Again, there may be some counter-arguments to say, well, they're only a support mechanism, they're not going to be doing the end development. But again, you do need the details from a visa perspective. Could you send your person or your employee over to the United States to do that type of work? I am no expert on this, but I certainly know that when I speak with attorneys in the United States, there are problems with people going from the UK business to the US business and performing these kinds of duties. Now, from a tax perspective, this is interesting because in the US there is something called effective connected income. Now, this is whereby an individual is doing some work on the soil of the United States. We've already looked at an example whereby they are doing some development work for an IT solution, and that customer is paying the business for that solution. They are now effectively doing work as an employee on that soil. The Internal Revenue Service are going to take a very interesting viewpoint to say should we now have that person taxable in the United States, irrespective of what the visa says. Now, if that's the case, we can look a broader spectrum and say what does the tax treaty between the United States and the United Kingdom say about permanent establishment? Now, we've already looked at the scenario whereby the UK business has some officers in the United States because where else are they going to be doing this work? So the employees moving over to the United States. There's a permanent establishment rule already in the United States because it's offices in situ. That individual is physically doing some work whereby there must be a contract in place with the end customer and this monetary consideration. That individual is now contributing to the business in order to get money from the end client. The IRS will look at this and say, this is a worker in the United States, and therefore they should be paying tax in the United States for the time that they're here. You could get into a bigger issue whereby you have an employee that's more than six months in a country, let's say eight months in the United States, and the IRS will say, Well, that's really interesting. Not only are we going to look at their wages, which will take taxes, thank you very much, and potentially social security, whilst there is a totalization agreement in place, so you could avoid social security taxes compared to national insurance that you pay in the United Kingdom. So don't panic about that. However, the fact that you've got an employee now in the United States for more than six months could determine to say, well, actually, you're substantially in the United States. Therefore, we want to tax you on your worldwide income, not just your US-driven income as being an employee of that business. We want to look at all of your forms of income. And not only that, we want to know your bank details, investment accounts, pension accounts. Now you have a huge amount of reporting requirements, which could be a huge headache for you as the employer, putting your poor employee through this because they may not have an idea that that's what they're going to be required. For you as the employer, what you also need to think about, well, you've sent your employee from the United Kingdom to the United States. Are they actually covered by insurance to travel? Are they insured whilst on US soil if you have them listed as your UK employee under your UK insurance? Do you now need to open up your insurance on the US as well? I'm hoping that this video and podcast has helped you just consider what you need to now move forward with in regards to things like taxation, visas, insurance, even HR policies and procedures. All of those things have to be considered before you send any of your employees over to the United States.