US bill threatens “double taxation for American expats in UK”

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

Tax experts have warned that the plan could eliminate the possibility of offsetting tax paid in the UK with US bonds on the same income.

The measures being considered by the United States Senate include abolishing a carry-back provision used when American expatriates have paid more taxes abroad than they owe in the United States.

If UK tax is paid in the calendar year immediately following filing of US income, current rules allow for a back adjustment.

However, the plans in President Biden’s $ 1.75 billion Build Back Better infrastructure bill would seek to abolish the ability to carry over to the previous U.S. fiscal year. If adopted, the measure would be effective from December 31, 2022.

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

The United States is highly unusual in linking a person’s tax obligations to citizenship, a feature they share with only one other country, Eritrea. This means that no matter where in the world they live, US citizens must complete a US tax return and pay US tax.

To avoid cash flow issues, advisers often recommend that Americans based in the UK pay their UK tax by December, rather than the self-assessment deadline of January 31, to match the US tax year. This is because for most Americans, only UK tax actually paid in the US tax year – 2021, for example – will be available for offsetting in their 2021 US tax returns.

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

“The consequences of poor year-end planning are therefore correctable,” Havard explained. “But the new system says, ‘Bad luck, mate. We’re not going to bother. You’re just going to have to make sure you pay at the right time to be able to claim. [your foreign tax credit offset]. We’re not going to let you pay in one year and carry over to the next.

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

“The UK is having this totally insane fiscal year for the rest of the fiscal year – and it’s creating problems for Americans here,” she said. “It affects how you can get a foreign tax credit. Most of us pay [tax] in January on income earned the previous year. If we can’t take that tax credit for the previous year, it’s a huge cash flow problem. You would end up paying two sums of money out of the same income – which is exactly what the [US-UK] tax treaty is meant to avoid.

Havard agreed the proposals could lead to a “permanent double taxation” situation. If the bill passes, he suggested Americans based in the UK could prevent this by making sure to pay their UK tax before the end of each calendar year.

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