Working in the UK for less than 183 days

Hi,

I hope someone can help me with some questions.  I have just started a 6-month contract in London.  I am employed by a US company.  They will be withholding US social security taxes, but no income taxes.

My questions are:
1.  What documentation is required regarding paying US social security rather than UK National Insurance?

2.  How much and in what manner do I submit payments to Inland Revenue for UK income tax?

3.  If I end up being here less than 183 days, will I owe any UK income tax and how does that impact my US income tax situation?

Thanks, Rich

Hi there

You will be exempt under the US / UK tax treaty from paying any UK income tax / UK soc Security provided that:

(1) You spend less than 183 days in the UK
(2) Your employer remains to be the US office
(3) Your expenses are borne / charges back to the US firm.

Does this answer your questions?

Helen

I could use some clarification on your third point.  So if I leave within 6 months, I have to pay no UK tax.  Will I still be able to exclude the $80,000 or whatever the 2003 limit will be from my US income taxes?

If my contract gets extended beyond 6 months, how does that change things?

Thanks, Rich

The third point is about your expenses in the UK (housing, COLA, etc).  If you get paid these here in the UK, but the UK company ultimately charges the US company for these expenses you will meet the third test.

if you end up leaving UK within the 183 day, you will not be charged to income tax or National Insurance in the UK. You will file a US Federal and State domestic return as per normal. The $80,000 exclusion is not available in this case. No foreign tax credit will also be taken as you have not paid any UK taxes. AND you will continue paying FICA and Medicare.

If you extend you assignment beyond 183 days, then you will be subject to UK taxation.  There is a new UK/US tax treaty in place (effective Janaury 2002) that says if you spend more than 183 days in the UK IN TOTAL (rather than during each UK tax year) you will have to pay UK tax. In this case you will have to start paying UK tax immediately.  You can still be paid from the US payroll, but your company has to operate a shadow UK payroll in order to pay the tax to the UK.  Federal and State withholdings also has to stop then.  Whether you will be entitled to the $80,000 exclusion in this case depends on how long you end up remaining in the UK and whether you have shifted you tax home from US to UK.  You will certianly be entiled to foreign tax credit though (if you start paying UK Tax).

What you should be aware is that there might be a cash flow issue for you if you extend you assignment, as for the first 6 months of your assignment you did not pay any UK tax and given that you will be here for more than 183 days you will have to pay UK tax on that portion of your income also.  So you can get money back from the IRS (when you file your US return) and pay it to the Inland Revenue (again when you file your return).  As the filing deadlines for each return is different you may face a cash flow problem.  Often companies advance an amount to their employees in similar situation to pay the tax on one return, until they get the refund on the other return.  They will then have to reimburse their emplyer at that stage.

If you continue getting paid from the US payroll, and your ultimate employer remains to be the US company, you can continue paying FICA and Medicare provided that you apply for a certificate of coverage under the totalisation agreement wbetween the US and UK.

I hope I have not completely confused you now.  It might be better if you call me and we can discuss this on the phone. I think this can be better explained verbally.

Regards
Helen