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US Tax Made Simple: What UK Businesses Need to Know
HGA Takeaway
US Tax Made Simple: What UK Businesses Need to Know
Thinking about selling, hiring, holding stock or setting up a business in the US? Here's a practical introduction to some of the tax decisions and obligations UK businesses need to understand.
The US can be a huge opportunity for UK brands, but the tax system isn't simply one set of rules applied across the whole country.
In this Business Academy session, BRDG explored some of the key tax considerations for UK founders, startups and scaleups expanding into America, from choosing a business structure to understanding federal tax, individual state obligations and transactions between UK and US companies.
For Home & Gift businesses, there are some particularly important points to understand. You don't necessarily need a physical shop or office in America before US tax obligations can begin. Your sales, stock, warehouses and even where your employees work can all matter.
Selling into the US and setting up in the US are not necessarily the same thing. Understanding when your obligations begin is the important bit.
Takeaway 1
You have choices about how you structure your US business
Two structures discussed in the session were the LLC and C-Corp. They work differently from a tax perspective, so choosing one shouldn't simply be a case of picking whichever sounds easiest to set up.
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LLC Pass through taxation Simple to form and maintain Potential disregarded entity risk for non-US owners Less familiar to US investors |
C-CORP Standard structure for VC backed startups Entity level tax Operates in a similar way to a UK Ltd Straightforward exit mechanics |
The presentation's recap specifically warns that an LLC can create a double taxation issue for a UK parent, while a Delaware C-Corp will usually avoid that particular mismatch. This is one of those areas where getting specialist advice before choosing your structure can save a lot of pain later.
Takeaway 2
Why does everyone talk about Delaware?
Delaware comes up frequently when businesses discuss US expansion, but it isn't simply because everybody else is doing it.
The session describes Delaware as a tried and tested option, with no sales tax, no state corporate income tax without a physical connection, neutral contract law and neutrality for non-US persons.
But incorporating in Delaware doesn't mean Delaware is the only state you need to think about. Where you sell, employ people and hold stock can create obligations elsewhere.
Takeaway 3
You don't automatically need to move your whole business to America
If you're looking for US investment, you may hear people talking about a US "flip", where a new Delaware parent company is created above your existing UK Ltd.
The important point from the session is that this isn't always necessary. Many US investors will invest directly into a non-US company, and a flip is typically driven by an investor requiring it.
If a flip is required, the presentation describes the process as:
1. A new Delaware parent is formed above the existing UK Ltd
2. UK shares are exchanged for shares in the new Delaware parent
3. The UK Ltd becomes a wholly owned subsidiary
4. Cross border tax reporting requirements then need to be considered
Takeaway 4
Selling through your UK company and a US company creates different obligations
The structure you use to sell in America affects how tax and reporting work.
According to the session, a US C-Corp currently pays federal corporate income tax on its net profit at a flat 21% rate. A UK entity can also become subject to US federal tax where income is effectively connected with a US trade or business.
There can also be additional reporting
Form 5472: the presentation highlights this for foreign owned US corporations and single member LLCs reporting related party transactions, with a $25,000 penalty for failure.
Form 5471: highlighted for US owners reporting interests in foreign companies, with a $10,000 penalty noted in the presentation.
Takeaway 5
US tax isn't just federal tax
This is probably one of the most important things for UK brands to understand. America has federal taxes, but individual states can create their own obligations too.
The presentation uses the term "nexus", meaning a taxable presence in a particular state. Crucially, nexus can sometimes be created even if you don't have a physical office there.
No US office doesn't necessarily mean no US state tax obligations.
Takeaway 6
Your sales alone can create a tax obligation
For sales tax, the session explains that economic nexus rules apply across sales tax states and Washington DC.
A common threshold highlighted in the presentation is $100,000 in sales and/or 200 transactions in a state per year, although the important caveat is that thresholds vary by state.
Once a sales tax threshold is triggered, you may need to:
Register in that state
Collect the relevant sales tax
Submit periodic filings
Takeaway 7
Selling through Amazon doesn't necessarily remove the problem
This one is particularly relevant to product brands.
Marketplace facilitators such as Amazon may collect sales tax on sales made through their platform, but the presentation makes an important distinction: your direct sales can still count towards your state nexus position.
Don't assume that because a marketplace handles sales tax on marketplace orders, you can ignore your overall sales activity in that state.
Takeaway 8
Where your stock is stored matters
For Home & Gift brands, this could be a big one.
Using a US third party logistics provider can make fulfilment quicker and easier, but storing inventory in a 3PL warehouse can also create tax nexus in the state where that stock is held.
Before putting stock into a US warehouse, ask:
Which state will the inventory actually be stored in?
Will that create sales tax nexus?
Will it create corporate income tax obligations?
Do we need to register in that state?
Takeaway 9
Where your people work matters too
You don't necessarily need a US office to create a physical presence for tax purposes. A remote employee working from a particular state can create nexus there.
For a UK Ltd, the session also warns that US employees can potentially create a US permanent establishment, exposing relevant profits to federal tax.
Using an Employer of Record can simplify payroll withholding, but according to the presentation it doesn't remove permanent establishment or nexus risk. The location where the employee actually works still matters.
Before hiring your first US employee, understand the tax impact of where they're going to be based.
Takeaway 10
You may need to register in individual states
As your US activity grows, there can also be state registration requirements beyond tax registration itself.
The presentation explains that a UK Ltd or C-Corp doing business in a new state may need to "foreign qualify" with that state's Secretary of State and obtain a Certificate of Authority.
Takeaway 11
Transactions between your UK and US companies need to be priced properly
If you end up with both a UK company and a US company, money and goods will often move between them.
The presentation explains that these intercompany transactions need to be priced on an arm's length basis. In simple terms, the pricing should be consistent with what unrelated businesses would charge each other in comparable circumstances.
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INTERCOMPANY LOANS Cross border financing should use an appropriate arm's length interest rate. |
MANAGEMENT FEES Charges for head office support and shared services need appropriate pricing. |
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GOODS & IP Inventory transfers and sublicensing fees need appropriate transfer pricing. |
HEAD OFFICE COSTS Shared corporate costs need to be apportioned appropriately between entities. |
Takeaway 12
Document your transfer pricing
It's not enough to decide on an intercompany price and forget about it.
The session stresses the importance of keeping appropriate documentation to support how those prices have been calculated. This can help support treaty benefits and defend the pricing if it comes under scrutiny from the IRS or HMRC.
If your UK and US businesses are trading with each other, treat those transactions as seriously as you would transactions with an unrelated company.
For Home & Gift businesses
The US opportunity is exciting, but growth can create obligations surprisingly quickly
For a UK Home & Gift brand, expanding into America might begin relatively simply. Perhaps a US retailer places a wholesale order, your website starts receiving more American customers or you begin selling through a marketplace.
As that grows, you might hold stock with a US fulfilment partner, employ somebody locally, increase direct to consumer sales or eventually establish a US company.
Each of those steps can change your tax position, which is why it's worth thinking about the structure before the business has already grown into it.
Five things worth tracking as your US sales grow:
1. Sales by individual state
2. Number of transactions by state
3. Where your US stock is physically stored
4. Where any US employees are based
5. Transactions taking place between your UK and US businesses
Put it into practice
Thinking about America? Start here
1. Map your current US activity
Look at where your customers are, how much you're selling into each state and which channels those sales come through.
2. Map your physical footprint
Know exactly where your inventory is stored and where any US based employees are working.
3. Don't rush into a US entity
Understand whether you actually need one and which structure is appropriate before incorporating.
4. Track state thresholds
US tax isn't only a federal issue. Monitor activity state by state so you're not surprised when a registration obligation is triggered.
5. Get specialist advice before the complicated bit happens
If you're setting up an entity, hiring employees, storing inventory or moving money and products between UK and US companies, get advice on the implications before making the change.
The HGA Takeaway
The US doesn't need to be scary, but don't wait until you're already there to think about tax
1. Choose your business structure carefully. An LLC and C-Corp can create very different outcomes for a UK owner.
2. You don't necessarily need a US parent company just because you're raising money from American investors.
3. Tax obligations can arise at both federal and individual state level.
4. Your sales can create nexus even without a physical presence.
5. US warehouses, 3PL stock and remote employees can all change your tax position.
6. Don't assume marketplaces such as Amazon remove all of your sales tax responsibilities.
7. If you have UK and US entities trading with each other, price and document those transactions properly.
A quick note
This article is intended as a general introduction based on the Business Academy session and does not constitute tax, legal or financial advice. US tax obligations depend on the individual circumstances of your business, so professional advice should be taken where appropriate.
One question to ask now
"Where are we already creating a footprint in the US?"
Look at your customers, sales, stock and people. You might be further into the US market than you realise.