UK residents receiving US income – managing tax withholding

If you are an individual or business in the UK receiving income from sources in the US, you should know that the IRS subjects such income to a 30% withholding tax.

While the US/UK Double Taxation Agreement (tax treaty) provides that the withholding rate be significantly lower or even nil (depending on the type of income), it can take years to recover tax wrongly withheld.

While tax withheld by the US can be used to offset your UK tax liability, it can only be so used up to the lower rates stipulated in the tax treaty, rather than the 30% actually withheld.

Your best approach is to claim the benefits of the tax treaty in the first place. Fortunately, the IRS provides a way to do this: the W-8 series forms, which prove to the payor or withholding agent that you are entitled to a lower or nil rate of withholding under the treaty.

There are several types of forms W-8, including some which apply specifically to unusual types of entities such as non-US governmental institutions. Here, we cover the three most common.

1. Form W-8 BEN

Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

Form W-8 BEN is used to reduce the rate of withholding on your US source income; for example, if you are a non-US individual who opens an account with a US financial institution, or who receives dividends from a US company. To complete this form, you need to give your name, address and other personal information, and identify the specific way in which the tax treaty applies to your situation.

2. Form W-8 BEN-E

Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)

Form W-8 BEN-E is used for example in contracting with a US customer. In addition to the requirements of form W-8 BEN, you need to identify your US chapter 3 tax status and chapter 4 FATCA status – the rules regarding the application of the treaty are also somewhat more complex.

3. Form W-8 IMY

Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting

Form W-8 IMY is used if you are a non-US partnership (or other flow-through entity) receiving US income

In summary

Individuals and businesses with any kind of US exposure are likely to suffer punitive rates of tax withholding unless they understand the W-8 series of forms. As the laws and regulations involved are highly technical, it is recommended to consult a qualified US tax adviser.

Help from the experts

At Moore Kingston Smith LLP, our US-UK tax service team has extensive experience of US and UK tax issues. We advise on withholding and distributions, preparing the W-8 series of forms and other aspects of cross-border tax planning. If you have any questions, or require advice of any kind, please contact our US-UK tax specialists.