Understanding the Dual-Taxation Landscape
When you operate a UK Limited Company that sells to US customers, you are effectively dealing with two different tax “bosses”: HMRC in the UK and the IRS in the US.
The good news is that the US and the UK share a robust tax treaty designed to prevent you from paying tax twice on the same profit. However, this protection isn’t automatic. You have to claim it.
In 2026, the UK Corporation Tax rate stands at 19% for profits up to £250,000 and 25% for anything above that. Meanwhile, the US Federal Corporate Tax rate remains at 21%. Balancing these credits is where many businesses trip up.
Determining Your US Tax Nexus
The first question the IRS asks isn’t “how much did you make?” but “do we have the right to tax you?” This is determined by “Nexus.”
Federal Nexus and Permanent Establishment (PE)
Under the US-UK Tax Treaty, your UK Ltd is generally only subject to US Federal Income Tax if you have a “Permanent Establishment” in the States. This typically means a fixed place of business, such as an office, a warehouse you own, or a dependent agent who has the authority to sign contracts for you.
State-Level Economic Nexus
This is where it gets tricky. The Federal Treaty protects you from Federal tax, but it does not always protect you from state-level taxes. Most US states now use “Economic Nexus” rules. If you sell over a certain threshold, often $100,000 or 200 transactions, into a specific state, that state may require you to register for Sales Tax and, in some cases, pay State Franchise or Income Tax.
US Sales Tax: The Silent Profit-Killer
Sales Tax is not the same as VAT. While VAT is a national tax in the UK, Sales Tax in the US is managed by individual states (and sometimes cities or counties).
For a UK Limited Company, the burden is on you to:
- Monitor your sales volume in every state.
- Register for a Sales Tax Permit once you hit a threshold.
- Collect the correct tax percentage from customers at the checkout.
- Remit that tax to the state on a monthly, quarterly, or annual basis.
Failing to collect Sales Tax doesn’t mean the state won’t want the money. If you miss a filing, the state will bill your company for the tax you should have collected, plus heavy penalties.
The Reality for US Citizens Running UK Companies
If you are a US citizen or Green Card holder living in the UK and running a UK Ltd, the complexity doubles. The IRS views your UK company as a Controlled Foreign Corporation (CFC).
GILTI and Subpart F Income
Even if you don’t bring the money back to the US, the IRS may tax your company’s “undistributed profits.” In 2026, the rules around Global Intangible Low-Taxed Income (GILTI) remain a primary focus for the IRS.
Without proper planning, these profits could be taxed at your personal US income tax rate, which can reach as high as 37%.
The §962 Election: Your Secret Weapon
One way to mitigate this is the §962 election. This allows an individual shareholder to be taxed as if they were a US corporation. By doing this, you can:
- Apply the 21% corporate tax rate instead of higher personal rates.
- Claim a 50% deduction on GILTI income (the Section 250 deduction).
- Use Foreign Tax Credits for the UK Corporation Tax your company has already paid to HMRC.
Managing this requires meticulous bookkeeping.
Essential IRS Forms You Cannot Ignore
Compliance is a game of paperwork. If you are a UK Ltd with US connections, you will likely encounter these forms:
- Form 1120-F: The US Income Tax Return of a Foreign Corporation. Even if you don’t owe tax due to the treaty, you often still need to file this to claim treaty benefits.
- Form 8833: This is the “Treaty-Based Return Position Disclosure.” This is how you tell the IRS, “Hey, I made money in the US, but the treaty says I don’t owe you income tax.”
- Form 5471: Required for US persons who are officers, directors, or shareholders in a foreign corporation. The penalty for missing this form starts at $10,000 per year.
Avoid These Common Mistakes in 2026
- Assuming the Treaty covers everything: Remember, the treaty usually only covers Federal Income Tax, not State Sales Tax or State Income Tax.
- Mixing Personal and Business Expenses: The IRS is incredibly strict on “piercing the corporate veil.” Keep your UK business banking strictly for business.
- Ignoring “Nexus” until it’s too late: If you’ve been selling in the US for two years without checking your thresholds, you might already owe thousands in back-dated Sales Tax.
- Neglecting UK Deadlines: While focusing on the US, don’t forget your UK obligations. Keeping your home-base compliance solid is vital.
