Freelancers’ Questions: Is tax due on US income if I left Italy to be a UK sole trader?

Freelancer’s Question: I am an Italian national with an Italian ‘partita iva’ (VAT number). I work as a creative freelancer for an American travel company.

Freelancers’ Questions: Is tax due on US income if I left Italy to be a UK sole trader?

Now I wish to move to the UK before the end of 2020 and I want to register as self-employed with HMRC to be a sole trader and keep on working and invoicing the same company. Apart from paying the 20% of taxes from £12,501 upwards (I know the first £12,500 is tax-free), do I have to pay any other taxes, since the money comes from the USA? In Italy I don't, but now I'm not sure about the UK. I don't earn more than £25,000 a year so I read I don't have to pay VAT either. 

Thank you sincerely for any help you can offer. Any clues on the pitfalls I should beware of would be great too! 

Expert’s Answer: If you come to work in the UK in 2020, you need to think about applying for ‘pre-settled status,’ as we are leaving the EU at the end of the year.

To get pre-settled status, you only need to show you have lived in the UK for one day out of the last six months. 

Post-pre-settled status, you'll need to mull NICs

Then, there is nothing to stop you working for your UK client as a self-employed person. You will have to pay your taxes and social security (National Insurance Contributions -- NICs). You are correct that the single person's tax allowance for 2020/2021 i.e. April 6th 2020 until the following April 5th 2021 is £12,500. The income is then subject to income tax at 20% up to £50,000. Higher rates apply above that level. 

As to the NICs, you usually pay two types of National Insurance if you are self-employed: 

  1. Class 2 if your profits are £6,475 or more a year 
  2. Class 4 if your profits are £9,501 or more a year 

You work out your profits by deducting your expenses from your self-employed income. A self-employed person can deduct business expenses in calculating the taxable income. To claim expenses, the items claimed for must be ‘wholly and exclusively for your trade.’ Potentially helpful to you, this can include expenses you incur before you become a UK tax resident.  

Numbers and ways

The amount of NICs you need to pay in 2020 to 2021 are: 

  • Class 2 £3.05 a week 
  • Class 4 9% on profits between £9,501 and £50,000 2% on profits over £50,000 

It might help you to know that most people pay their NICs in the same way as their income tax, namely, by completing a self-assessment tax return. There are two ways you can do this. You can: 

  • file your self-assessment tax return online
  • download and fill in HMRC form SA100

Bear in mind, the VAT threshold in the UK is £85,000 so, currently, you do not need to register for VAT until your turnover reaches that limit. You are able to register on a voluntary basis under this £85k threshold, if you wish.

Invoicing? It's business as usual

You mention invoicing. Fortunately, the invoicing requirements in the UK will be identical in all practical matters to those you are familiar with from living in Italy, when billing your American client.

The invoice will need to carry the names and address of you and your client, the registered address (if you were to become a company), and the amount that you are invoicing for.

Should you become VAT registered, then you need to include your VAT number and the net amount that you are invoicing,  the VAT thereon and the total sum you expect your client to pay you together with the value date for VAT.

The 183-day rule

Lastly, suppose you stay in the UK for more than 183 days in a tax year (April 5th till the following April 5th), you will become a UK tax resident, which means that you become subject to tax on your worldwide income. 

Once here, the fact that you have income coming from a client in America is fine. That income should not be taxable in the United States, as you have no presence there. As said, this income will form part of your worldwide income and be taxable only in the UK once you've left Italy.

I think this has covered most of the areas that should affect you – let me wish you the best of luck in your exciting relocation journey! 

The expert was Kevin Austin, chief executive of accounting firm and overseas compliance advisory Access Financial.