For years, UK residents who formed US single-member LLCs operated under a reasonable assumption: because the IRS treats a single-member LLC as a "disregarded entity," the income passes through to the individual. HMRC would see it the same way. The founder would report LLC income on their UK Self Assessment as personal income, and the US-UK Double Taxation Convention would handle any overlap.
That assumption broke in April 2025.
HMRC now classifies US LLCs as "opaque" entities -- treated as if they were corporations, not pass-through vehicles. This creates a structural mismatch: the IRS sees the LLC as invisible (income taxed on the individual's return), while HMRC sees it as a separate taxable entity (a foreign company). The US-UK Double Taxation Convention's relief mechanisms were not designed for this asymmetry. A UK resident operating a US LLC may face a scenario where neither country's tax credit provisions fully eliminate the double taxation.
The change did not happen overnight. HMRC signaled its position through updated guidance in the International Manual (INTM) and a series of technical interpretations starting in 2023. But the practical implications -- how to report, what credits are available, what alternatives exist -- have left UK founders with US LLCs in a documentation gap that most online LLC formation guides have not caught up with.
What Does "Opaque" Mean in HMRC's Framework?
HMRC classifies foreign entities using its own criteria, independent of how the entity's home jurisdiction classifies it. The relevant guidance is in HMRC's International Manual at INTM180000 onward.
HMRC applies a functional test: does the entity have a legal personality separate from its members? Can it hold property in its own name? Do its members have limited liability? Is the entity's existence independent of its members?
A US LLC answers "yes" to all of these. Under the laws of every US state, an LLC is a legal entity separate from its members. It holds property in its own name. Its members have limited liability. It continues to exist independent of any individual member.
HMRC's conclusion: a US LLC is a "body corporate" -- a term that, for UK tax purposes, means the entity is treated as a company. Not a partnership. Not a transparent entity. A company.
How This Differs from the IRS View
The IRS has a different mechanism. Under Treasury Regulation Section 301.7701-3, a single-member LLC is a "disregarded entity" by default -- meaning the IRS treats it as if it does not exist for federal income tax purposes. The member reports all income on their personal return.
HMRC has no equivalent check-the-box system. It does not adopt the IRS classification. It applies its own legal analysis based on the characteristics of the entity under the law of the jurisdiction where it was formed.
The result: the same entity is transparent for US purposes and opaque for UK purposes.
The Classification Mismatch Problem
This is where the structural risk emerges. The mismatch is not merely academic. It affects which treaty articles apply, how income is characterized, and whether double tax relief is available.
How Income Flows Under Each View
US perspective: The LLC earns $100,000 in revenue. The IRS does not see this as corporate income. The income "passes through" to the individual member, who reports it on their personal US tax return (Form 1040-NR for a non-resident alien). If the founder is a UK resident with no US-source income and no US permanent establishment, the US may impose zero federal income tax on this income.
UK perspective: HMRC sees the same $100,000 as income earned by a foreign company (the LLC). The UK-resident member did not earn income -- the company did. The member's taxable event, in HMRC's view, occurs when the LLC distributes profits to them. The distribution is then treated as dividend income from a foreign company.
Where the Treaty Breaks Down
The US-UK Double Taxation Convention is designed to prevent the same income from being taxed twice. Article 24 (Elimination of Double Taxation) provides mechanisms -- primarily tax credits -- to offset tax paid in one country against tax owed in the other.
But the credit mechanism depends on both countries agreeing on what is being taxed and who is being taxed.
Under the US view, the individual earned the income. Under the UK view, the company earned the income. These are different taxpayers and different income characterizations. Article 24 provides credit for tax paid by the same person on the same income. When the US taxes the individual and the UK taxes distributions from a company, the treaty's matching mechanism does not align cleanly.
Practical Scenario: UK SaaS Founder with a Wyoming LLC
Take a UK-resident founder who operates a SaaS business through a Wyoming single-member LLC. The LLC has $120,000 in annual revenue, $40,000 in expenses, and $80,000 in net profit. The founder pays themselves the full $80,000 as a distribution.
Under the IRS
The LLC is disregarded. The IRS attributes the $80,000 in net profit to the individual. If the founder is a non-resident alien and the income is not "effectively connected" with a US trade or business, the US imposes no federal income tax on this income.
The founder still files Form 5472 with a pro forma Form 1120, reporting transactions between the LLC and its foreign owner. Failure to file triggers a $25,000 penalty per year.
Under HMRC
HMRC treats the LLC as a foreign company. The $80,000 distribution is characterized as a dividend from an overseas company.
The founder reports this on the Self Assessment tax return under foreign income. The tax treatment of the dividend depends on the founder's UK income level:
- Basic rate (up to 50,270 GBP): 8.75% on dividends above the 1,000 GBP dividend allowance
- Higher rate (50,271-125,140 GBP): 33.75%
- Additional rate (above 125,140 GBP): 39.35%
The Credit Problem
If the founder paid zero US tax (because the income was not effectively connected), there is no US tax to credit against the UK liability. The UK taxes the full dividend at the applicable rate.
If the founder did pay US tax, the founder has US tax on the individual's business income and UK tax on a corporate distribution. The foreign tax credit claim on form SA106 is available for US tax paid, but the credit is limited to the UK tax attributable to the same income. Because the income characterization differs, HMRC may restrict the credit.
Comparison: US LLC Tax Treatment -- UK vs. US Perspective
| Aspect | US (IRS) View | UK (HMRC) View |
|---|---|---|
| Entity classification | Disregarded entity (default SMLLC) | Opaque / body corporate |
| Income attribution | Passes through to individual member | Stays within the entity until distributed |
| Tax event for member | Income earned = taxable to member | Distribution received = taxable to member |
| Income characterization | Business income / self-employment income | Dividend income from foreign company |
| Applicable tax rates | US graduated rates (if ECI) or 0% (if not ECI) | UK dividend rates: 8.75% / 33.75% / 39.35% |
| Filing form (member) | Form 1040-NR (individual) | SA100 + SA106 (foreign income) |
| Treaty article for relief | Article 7 (business profits) or Article 22 | Article 10 (dividends) or Article 22 |
| Foreign tax credit | N/A (US is source country) | FTCR on SA106, limited to UK tax on that income |
The Alternative: UK Ltd with US Operations
The classification mismatch exists because the US LLC is transparent for IRS purposes and opaque for HMRC purposes. A UK limited company (Ltd) avoids this particular problem.
The UK founder forms a UK Ltd and operates their SaaS business through it. The Ltd is the operating entity -- it invoices clients, holds intellectual property, and employs (or contracts with) the founder. If the business has US clients or US operations, the Ltd can register as a foreign entity in a US state and open a US bank account without forming a separate US entity.
There is no classification mismatch. Both HMRC and the IRS see the same entity type -- a foreign corporation. The treaty's provisions for eliminating double taxation align because both countries classify the entity the same way.
A UK Ltd adds administrative overhead: annual accounts filed with Companies House, Corporation Tax returns, payroll administration for the founder's salary, and compliance with UK employment law. For founders with very low revenue or who are testing a business idea, the overhead may exceed the benefit.
Key Takeaways
- HMRC classifies US LLCs as opaque entities -- treated as foreign companies, not pass-through vehicles -- based on the LLC's legal characteristics
- The IRS treats the same single-member LLC as a disregarded entity, attributing all income to the individual member -- this creates a classification mismatch between the two jurisdictions
- The US-UK Double Taxation Convention's credit mechanism may not fully resolve the mismatch, because the US taxes business income of an individual while the UK taxes dividend income from a foreign company
- UK residents report LLC distributions on SA106 as dividends from a foreign company, subject to dividend tax rates (8.75% / 33.75% / 39.35%) rather than trading income rates
- A UK Ltd operating in the US avoids the classification mismatch entirely -- both HMRC and the IRS classify it as a foreign corporation, and the treaty provisions align
- Form 5472 filing obligations remain regardless of how HMRC classifies the LLC
Originally published at Global Solo -- structural risk visibility for cross-border founders.
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