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US bill threatens ‘double taxation for American expats in UK’

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UK-based Americans face cash flow headaches and possible double taxation due to a expatriate tax change proposed by the Biden administration

Tax experts warned that the plan could eliminate the ability to offset tax paid in the UK against US liabilities on the same income.

Measures being considered by the US Senate plan to abolish a carry back provision used when American expats have paid more tax abroad than they owe in the US.

If UK tax is paid in the calendar year immediately following when the income is reported in the US, current rules allow for a backwards adjustment.

However, plans contained in President Biden’s $1.75tn Build Back Better infrastructure bill would seek to abolish the ability to carry back into the previous US tax year. If passed, the measure would be effective from December 31 2022.

John Havard, director at accountancy firm Blick Rothenberg, said the measure, probably planned for administrative convenience, would have big “implications for people in the future”.

The US is highly unusual in linking a person’s tax obligations to citizenship, a characteristic it shares with just one other country, Eritrea. This means that regardless of where in the world they live, US citizens must complete a US tax return and pay US tax.

To avoid cash flow problems, advisers often recommend UK-based Americans to pay their UK tax by December, rather than the self-assessment deadline of January 31, to match the US’s calendar tax year. This is because for most Americans only UK tax actually paid during the US calendar tax year — of 2021, for instance — will be available for offset in their 2021 US tax returns.

Paying UK tax later, for example, in January 2022 would mean that the individual would need to wait until their 2022 US tax return before they could claim an offset. The current carry back provision provides a buffer by allowing people to use any excess tax offset for the previous US tax year.

“The consequences of flawed year-end planning are thus correctable,” Havard explained. “But the new system says: “Hard luck mate. We’re not going to bother ourselves. You’re just going to have to make sure you pay at the right time so you can claim [your foreign tax credit offset]. We’re not going to allow you to pay in one year and carry back into the other.”

Jaime McLemore, a UK-based American and a partner at law firm Withers, said the cash flow problems that could result from the new proposals were partly a result of the UK’s unusual tax-year which runs from April 6 to April 5.

“The UK has this totally insane to the rest of the world tax year — and that does create issues for Americans over here,” she said. “It does affect the way you can take foreign tax credit. Most of us pay [tax] in January on income earned the previous year. If we can’t then take that tax credit for that previous year, it’s a massive cash flow issue. You’d end up paying two lumps of cash on the same income — which is exactly what the [US-UK] tax treaty is meant to avoid.”

Havard agreed that the proposals could result in a situation of “permanent double taxation”. If the bill is passed he suggested that UK-based Americans could prevent this from occurring by making sure they pay their UK tax before the end of each calendar year.



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