Stick or twist: Which way out of crisis for the American abroad?

The global economic crisis has made a good many people rethink their careers, among them a number of our expatriate clients who are leaving employment to work for themselves.

Tax, though, makes the decision a hard one. For our US clients here, there is a top rate of 50% and uncertainty back home. If rates stay the same in the US there could be a significant difference in rates. Stay or go? Every situation will be unique; every choice will depend on the profit anticipated, the money needed from the business for living expenses, the timing, the resulting tax position.

Take Bob. He’s a Floridan who has been in Britain for eight years and took a redundancy package in April. He has already established himself as a contractor, here and in the US, and does not want to leave Britain for the medium term. He asked us to see how best to structure his business from both a UK and US tax perspective.

Bob could incorporate as a British or American company, become a US LLC (which is transparent for US but not usually UK purposes), use different vehicles to work in each country or be a sole trader in both. 

We worked with him on his profit projections, and knowing how much money he needed from the business, we were able to recommend the best solution for him. We considered tax planning and social security compliance in both jurisdictions, currently and with a view to future disposal of the business. We looked at optimising foreign tax credits and at the different information reporting requirements in the US and UK. Finally, we told him the likely costs of dual compliance and preparation of tax returns.

In the event, it made most sense for Bob to remain a sole trader, at least for the next 12 to 18 months. If he made a loss it could be set against his employment income from earlier in the year.

We will continue to work closely with Bob; if his situation changes, so will our advice. Thus far, we have registered him as self-employed and explained how his cash-flow will differ now he is working for himself. His first accounts will be made up to December, to make his US filings easier. Although tax for 2010/2011 will not be due until January, 2012, we have advised him to pay no later than December, 2011.

Of course Bob has other options - and being members of IGAF we could help. He could base himself in another European country, for instance, like Switzerland or France. The self-employed have more freedom to make a lifestyle choice, though there is no avoiding US tax issues and interaction with any local taxes can cause problems or opportunities.

Remember, too, if relocation seems tempting, that the UK taxman is not easily shaken off.

Fiona Pearce is a Director in the Expatriate Tax Services Team.