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I have a friend in the US who owns a company, and he wants me to make an app for him. The arrangement would be a monthly fee until the app is done, and a lump sum at the end. I'm almost certain this would be considered to be contracting.

How would one go about setting up an arrangement such that my friend won't have any legal liabilities/taxes/presence in the UK, and so that I won't have any legal liabilities/taxes/presence in the US?

I guess ideally they would just send me an international bank transfer and I would pay taxes as a self-employed at the end of the year but I'm not sure if it is that simple? Are there any weird things to keep in mind? Anything that can bite me in the ass? Do I need to set up an Ltd?

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You start a limited company in the UK. You send your friend monthly bills, and he pays them. The bills would not include VAT because he is in the USA. He takes your bills and deducts them from his profits. You fill out the tax forms for your company; the easiest is to get an accountant. Especially if this is your sole job, so you want to be an employee of the company, which means you (as the company) have to look at PAYE and NI. And you figure out what's the optimal amount of salary and dividends to get your money.

Think about whether you have a contract for dollars or pounds, which makes a difference if the exchange rate changes.

PS. If you are a UK resident, but a US citizen, things could be complicated. (That's particular to US citizens, because the USA want to get taxes for their world wide income. Other citizens, you'd need a work visa but you need that for any job).

PPS: it seems according to comments that for US citizens living in the UK this may be not just complicated but very costly. So you would talk to a tax adviser with relevant knowledge. Before you send the first bill out, preferably before you start work.

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    The warning in the PS is very important to take to heart. If you are a US citizen (even a dual US citizen), earning even a small amount of US income can become very, very expensive. Jan 24, 2023 at 20:38
  • Is a limited company strictly necessary? A sole trader can still pay taxes and it will be less burdensome than having to create a company and all of the associated paperwork.
    – scotty3785
    Feb 10, 2023 at 10:00
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But IDK if it is that simple?

In general, that's the way it works. Your UK legal entity provides services to your friends US entity. You sent an invoice and they pay you like any other vendor they use with whatever standard process they use.

Each legal entity follows their local rules for accounting, taxes, reporting, etc.

Are there any weird things to keep in mind? Anything that can bite me in the ass?

Not really, if you set it up correctly. Make sure you have a supplier contract that spells out all the details up front: Liability, indemnification, purchase orders, invoicing process, non-disclosures, penalties, payment terms and currency, etc. There are probably templates for this stuff somewhere, if your friend doesn't have a standard supplier contract just yet.

Do I need to set up an Ltd?

I recommend it. In most case you will have some liability exposure and it's a good idea to buffer that through an appropriate legal setup. Example: if you accidentally use code that violates a patent or copyright and someone sues your friend in the US, you will be liable to them.

Bonus tip: Watch out for bank fees. International transfers can be slow and costly especially since the banking system in the US is archaic as compared to most other civilized places in the world. I have a US based LLC but I'm using an "international" bank account. This way I can invoice clients in US$, in Euro, and in UK pounds using local currency and local bank accounts. The transfers happen inside my international account at a much lower cost than most other banks would charge. I use wise.com. No advertising intended, but it's been working quite well for my business.

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I did just this for a US company about 10 years ago but from NZ. I was considered a contractor. You only need to worry about your end and let your friend figure out his.

At my end, I set up a partnership (not a Ltd liability company) - check your independent contractor obligations around tax for the UK and make whatever arrangements you have to.

For me, I had to pay a local income tax, but no GST (US company doesn't pay NZ GST).

I basically had to invoice them each month to be paid.

The biggest issue you will face is getting paid. The company paying you will pay a fee for the international money transfer. You will likely also pay a fee to receive it. It wasn't cheap. So minimise the transfers or set up a foreign currency account to minimise the fees at your end.

I recommend the services of an accountant also.

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