The situation
An SEO agency based in Manchester's Northern Quarter had grown steadily for six years, specialising in technical SEO and content strategy for ecommerce brands. By early 2025, the agency employed 14 people across two teams, one in Manchester, one remote in the UK, and had annual revenue of £1.8 million. The founder, a former in-house SEO manager, had built the agency on a mix of monthly retainers and project-based work, almost entirely from UK clients.
That changed in late 2024 when a US-based direct-to-consumer brand approached them for a six-figure SEO retainer. The client was headquartered in Delaware with a fulfilment centre in Ohio, but had no UK presence. The retainer was worth £120,000 per year, invoiced monthly in US dollars. Within six months, the agency had signed two more US clients, a SaaS platform in Austin and a premium pet food brand in Colorado, pushing US revenue to £280,000 per year, roughly 15% of total turnover.
The founder knew this created complications. The agency was VAT-registered in the UK (its UK revenue exceeded the £90,000 threshold) and paid corporation tax at 25% on profits above £250,000. But the US clients were not UK businesses, and the services were delivered remotely from Manchester. The founder had heard about "reverse charge" rules and "double taxation" but wasn't sure how they applied to a service business like his.
The decision
The founder needed to understand three things clearly:
- Whether the US revenue was subject to UK VAT, and if so, how to charge and report it
- Whether the US revenue was subject to US tax, and if so, how to avoid paying tax twice on the same income
- How to structure the agency's finances so that the US revenue didn't accidentally push the UK corporation tax bill into a higher bracket or create a cash-flow problem
He also wanted to know whether it was worth setting up a separate US entity, a Delaware LLC or a C-corp, to handle the US clients directly, or whether the existing UK structure could work cleanly.
What we modelled
We modelled three scenarios using the agency's actual numbers for the 2025/26 tax year, assuming UK revenue of £1.8 million and US revenue of £280,000. We used Xero and Float for cash-flow projections, and cross-referenced the VAT treatment against HMRC's place-of-supply rules for B2B services.
Scenario 1: Keep everything in the UK Ltd company, treat US revenue as standard-rated for VAT.
Under this scenario, the agency would charge 20% UK VAT on every US invoice, adding £56,000 to the client's cost. The US clients, none of whom were UK VAT-registered, would have to pay that VAT, and the agency would remit it to HMRC quarterly. The US clients would not be able to reclaim that VAT, making the agency's pricing uncompetitive. The agency's UK corporation tax bill would be calculated on total worldwide profits (UK + US), so the £280,000 would be taxed at 25% (since total profits exceeded £250,000). The US would also tax the income, but the UK would give foreign tax credit relief for any US tax paid, provided the agency could prove it.
Scenario 2: Treat US revenue as outside the scope of UK VAT (reverse charge), and pay US tax via a US tax return.
Under this scenario, the agency would not charge UK VAT on US invoices, because the services were supplied to a business customer outside the UK. Instead, the US client would account for any US sales tax or VAT themselves under the reverse charge mechanism. The agency would still report the revenue on its UK VAT return (box 6, and box 7 if the client was outside the EU), but no UK VAT would be due. The agency would then file a US tax return (Form 1120-F for a foreign corporation) to report the US-source income. The US would tax the income at the federal rate of 21%, plus any state-level tax (Delaware had no state corporate tax, but the clients in Texas and Colorado did). The UK would give foreign tax credit relief for the US tax paid, so the effective UK tax rate on that income would drop from 25% to around 4% (the difference between the UK rate and the US rate).
Scenario 3: Set up a US LLC or C-corp, invoice US clients from the US entity, and pay a management fee to the UK company.
This scenario involved incorporating a US entity (a Delaware LLC, taxed as a C-corp by default for foreign owners) and transferring the US client contracts to it. The US entity would invoice the clients in dollars, pay US federal tax at 21%, and then pay a management fee to the UK company for the SEO work performed in Manchester. The management fee would be deductible in the US and taxable in the UK. The UK company would then pay UK corporation tax on the management fee income. The net effect was similar to Scenario 2, but with additional legal and accounting costs (US filing fees, state registration, separate bank account, US tax return preparation). The agency would also need to comply with US state-level registration in Texas and Colorado, which had franchise taxes and sales tax requirements.
The outcome
The founder chose Scenario 2, keep the UK Ltd company, treat US revenue as outside the scope of UK VAT, and file a US tax return to report the US-source income. The decision came down to simplicity and cost. Setting up a US entity would have cost roughly £5,000 in legal fees and annual compliance costs of £3,000, with no clear tax advantage over the foreign tax credit route.
The agency implemented the change in April 2025. They updated their Xero settings to tag US invoices as "outside scope" for VAT, and began filing quarterly US tax returns using a US-based accountant who specialised in foreign-owned companies. The US tax bill for the first year was £58,800 (21% of £280,000), and the UK corporation tax bill on the same income was reduced by the same amount via foreign tax credit relief. The net UK corporation tax on the US revenue was zero, the UK effectively recognised that the US had already taxed the income at a rate higher than the UK's marginal rate.
The agency also saved the £56,000 in UK VAT they would have had to charge under Scenario 1, keeping their pricing competitive against US-based SEO agencies. The US clients were happy because they didn't have to deal with UK VAT invoices or reclaim processes.
One unexpected benefit: the agency's cash flow improved. Under Scenario 1, they would have had to hold the VAT collected from US clients and pay it to HMRC quarterly, creating a timing mismatch. Under Scenario 2, no VAT was collected, so the full invoice amount hit the bank account immediately.
What others can learn
- Place of supply matters more than where your client is based. For B2B services, the place of supply is where the customer belongs, not where you perform the work. If your client is a business outside the UK, you generally don't charge UK VAT, but you must still report the revenue on your VAT return.
- Foreign tax credits prevent double taxation, but only if you file correctly. The UK gives credit for foreign tax paid on the same income, but you need to prove the foreign tax was actually paid. Keep separate records of US revenue, US tax paid, and the exchange rates used.
- A US entity is rarely worth it for service businesses under £500k US revenue. The compliance costs and complexity of running a US company from the UK usually outweigh the tax benefits, especially when foreign tax credits are available.
- Check state-level requirements in the US. Even if you don't have a physical presence in the US, some states (like Texas and Colorado) require foreign companies to register and file franchise or income tax returns if they have clients there. Ignoring this can lead to penalties.
- Use software that separates VAT treatment by client location. Xero and FreeAgent both allow you to set default VAT treatment per contact, so you don't accidentally charge UK VAT on US invoices. Float can help you model cash-flow impacts of different VAT scenarios.