You could get rid of one of the westernmost american indian factions or one of the minor euro factions like westphalia. If it has to be a vanilla playable faction then use the Cherokee slot.
As for flag dont worry, you can use any. I can mod the flag I want later on.
If you using iceland you can name that faction Icelandic Commonwealth .. if using Ceylon you can name it Mithran Federation.
This might be icing on the cake but I've not been able to figure out how to mod this myself: I would LOVE all my troops to wear the same berets the UK rangers wear (blue ones). If its too time consuming dont worry about it, ill figure it out eventually .
Edit: As an added bonus, if you do manage to pull this mod it will serve as the core for a mod im planning.. it will be a completely different perspective gameplay set in the ETW universe.