If you sign up for a Smashwords account, put in your country as the UK, and then have a look at the Payee page
- it'll tell you how much the IRS withholds if you do have all the paperwork filled out.
You may find that Lulu will change its tune if the IRS pounce on it. They may be taking the angle that a foreign ISBN indicates a distribution agreement, not an employment situation *shrug* The IRS apparently has no specific guidance in the ecommerce field, just demands to pay up!
It's a pain in the neck, I'll grant, but there's the 'joy' of doing business in the US. Sooner or later, if we act as our own agents, we're going to run into these problems. Amazon will (if it doesn't already) have the same problems, I'd think. The IRS MIGHT sometime make it clear what the rules are...