US–UK Tax Liabilities: The “Special Relationship” and Double Taxation
By Michael Paulin, tax and public law barrister at 1 Crown Office Row, London. Michael.paulin@1cor.com
Paying tax in the United States does not automatically discharge your UK tax liability. Equally, HMRC’s refusal of relief is not necessarily the final word. The UK–US tax treaty and domestic legislation must be applied to the particular income, taxpayer and legal arrangements.
In August 2019, I established my own law office in Rockefeller Center, New York. That experience forms part of my professional connection with the United States. Today, my practice includes advising internationally based clients on UK tax disputes, residence and the UK–US treaty.
The political “special relationship” does not eliminate differences between the two tax systems. Three reported cases illustrate how those differences arise—and how careful legal analysis can challenge HMRC’s position.
Can the UK and US tax the same income?
Both countries may assert taxing rights over income connected with their jurisdictions. Treaty exemptions, restrictions and tax credits can address that overlap, but relief depends on satisfying the relevant conditions.
The practical questions are: who is taxed, on what income, under which provision, and what relief is available? A US tax payment and a UK assessment may concern the same economic receipt while treating its legal character differently.
Anson: US business profits and Delaware LLCs
In Anson v HMRC [2015] UKSC 44, a UK-resident individual paid US tax on his share of a Delaware limited liability company’s profits. HMRC disputed his entitlement to credit against UK tax. The appellant, Mr Anson was at all material times resident but non-domiciled in the UK for UK tax purposes. He was liable to UK income tax on his UK sourced income and on foreign income remitted to the UK. He was non-resident in the US for US tax purposes, but was liable to US federal and state taxes on his US sourced income.
Mr Anson had remitted the income of his LLC to the UK, and then relied upon the double tax treaty as relief from income tax on those remittances. HMRC decided that Mr Anson was not entitled to any double taxation relief, on the basis that the income which had been taxed in the US was not his income but that of the limited liability company. The taxpayer therefore found himself in the unenviable territory of having to argue that the income to an incorporated entity was in fact his own in a relevant, tax relief justifying, sense.
The Supreme Court defined the taxpayer’s somewhat challenging economic reality as follows at [25]:
“The question is whether he is liable to pay UK income tax on that balance at the rate of 40%, producing what he would say is an effective rate of taxation of 67% (ie £45 in US taxes for every £100 of income, plus £22 in UK tax, calculated as 40% of the £55 remitted after payment of US taxes), or is entitled to double taxation relief”.
HMRC argued that the US taxed Mr Anson on his share of the LLC’s profits, whereas the UK taxed distributions received from the LLC. On that analysis, the two countries were taxing different income, preventing credit relief. The Supreme Court rejected that conclusion on the findings concerning his entitlement to profits as they arose.
The taxpayer was successful on his second ground of appeal, namely that as a matter of UK tax law, and on the findings which the FTT made and was entitled to make, Mr Anson was liable to tax in the UK on his share of the profits of the trade carried on by the LLC, which was the same income as had been taxed in the US.
The Supreme Court found for Mr Anson on ground two: ruling that he qualified for relief under article 23(2)(a) of the 1975 Convention, which provides that:
“United States tax payable under the laws of the United States and in accordance with the present Convention, whether directly or by deduction, on profits or income from sources within the United States (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits or income by reference to which the United States tax is computed”.
On the factual findings concerning Delaware law and the LLC agreement, he was entitled to profits as they arose. His UK and US liabilities therefore concerned the same income, allowing double-taxation relief.
The practical lesson is to examine the member’s legal entitlement, not simply the label “LLC”. The agreement, governing law and allocation of profits can be decisive.
The decision does not establish that every US LLC is transparent for UK tax purposes. HMRC continues generally to regard Delaware LLCs as opaque and treats Anson as fact-specific. A claim requires analysis of the actual arrangements.
Macklin: US pensions received in the UK
In Macklin v HMRC [2015] UKUT 39 (TCC), a former World Bank employee returned to the UK and received pension payments from its retirement plan.
He claimed partial exemption under Article 17(1)(b) of the UK–US treaty. HMRC argued that the scheme did not satisfy the treaty requirements.
The Upper Tribunal allowed his substantive appeal, rejecting HMRC’s restrictive interpretation of a pension scheme “established in” the United States. Newey J held that [46]: “and (a) ‘established in’ refers to a pension scheme’s physical location and (b) a pension scheme need not necessarily be “generally exempt from taxation” as such”
The lesson is that HMRC’s interpretation must be tested against the treaty’s actual language. For someone receiving a US pension, advice should examine the scheme’s status, the relevant payment and its treatment under US law. Macklin is not a blanket exemption for all US pensions.
Aozora: can domestic relief survive a refusal of treaty benefits?
In HMRC v Aozora GMAC Investment Ltd [2022] UKUT 258 (TCC), the dispute concerned credit for US withholding tax on interest received by a UK company.
Treaty benefits were unavailable under the limitation-on-benefits provisions. HMRC argued that the relevant UK legislation also prevented unilateral credit relief.
The Upper Tribunal at [35] applied Anson on treaty interpretation: namely the principle that treaty provisions must be interpreted in their context and in light of the treaty’s object and purpose, adopting an international rather than exclusively English approach.
The Upper Tribunal rejected HMRC’s interpretation of the word “effect” in Section 793A(3) Income and Corporation Taxes Act 1988. A straightforward interpretation of that provision entailed that the relief was available.
The absence of treaty relief did not, on the provisions considered, automatically exclude relief under domestic law.
The lesson is to examine every available legal route. A failed treaty claim does not necessarily conclude the analysis, although domestic relief has its own requirements.
How I approach a US–UK tax dispute
My experience resolving difficult, high-value disputes for businesses and professionals informs a forensic and commercially focused approach.
I start with HMRC’s precise contention and the documents establishing the client’s rights. I then distinguish:
Whether the underlying UK liability is correctly asserted.
Whether treaty relief applies.
Whether domestic credit or other relief is available.
What evidence of US law or tax treatment is needed.
Where appropriate, I work with US counsel and accountants. The objective is to identify a properly supported challenge or workable resolution, with candid advice on risks and costs.
Obtain advice on your US–UK tax position
I accept Direct Access instructions where appropriate and am authorised to conduct litigation. Initial advice can be provided for an agreed fixed fee.
Email michael.paulin@1cor.com with a brief outline of the issue, the income involved and any HMRC deadline.