Policy paper

Statement of Practice 7 (1991)

Published 26 July 1991

1. Section 790 Income and Corporation Taxes Act (ICTA) 1988 sets out the basis under which relief (‘unilateral relief’) may be given for foreign tax in the absence of a Double Taxation Agreement. The section sets out the conditions precedent to the granting of relief. So far as business profits are concerned the foreign tax is admissible for relief only if it is a tax which is payable under the law of the foreign territory, a tax which is computed by reference to income arising in the foreign territory, a tax which is charged upon income and a tax which corresponds to Income or Corporation Tax.

2. Hitherto HM Revenue and Customs (HMRC) have interpreted the conditions so as to exclude from relief a number of foreign taxes having characteristics similar to turnover taxes, that is to say taxes computed by reference to a prescribed proportion of a gross amount of fee or contractual sum from which expenses fall to be deducted in arriving both at the commercial profit and at the amount which, in the UK, would be assessable under Case I or II of Schedule D. The taxes excluded from relief were those where the proportion of the gross amount charged to tax prompted the view that the tax could not reasonably be regarded as corresponding to UK Income or Corporation Tax charged upon net profits.

3. Following consideration of the point in the High Court (Yates v GCA International Ltd (formerly Gaffney Cline and Associates Ltd (1991) BTC 107)), HMRC have decided to change their interpretation. In future the question of whether or not a foreign tax is admissible for unilateral relief under Section 790 ICTA 1988 will be determined by examining the tax within its legislative context in the foreign territory and deciding whether it serves the same function as Income and Corporation Tax serve in the UK in relation to the profits of the business. Turnover taxes, as such, are not therefore affected by the revised interpretation and will continue to be inadmissible for relief. The revised interpretation will take effect from 13 February 1991 when judgment was given in the High Court, and will apply to claims made on or after that date and to earlier claims unsettled at that date. Taxpayers who would like HMRC to review a previous decision in respect of a specific foreign tax are invited to address their enquiry to:

HMRC
CT and VAT
100 Parliment Street
London
SW1A 2BQ

4. It should be noted however that the admissibility of the foreign tax is only one aspect of unilateral relief which can give rise to disputes between HMRC and the taxpayer. Relief is only available in respect of the foreign tax on income arising in the foreign territory, and according to the facts of the particular case there may be room for argument as to where the income arose and to the amount of the income, having regard to the different principles of law in the foreign territory and in the UK. In the light of the High Court decision HMRC practice will continue to be to determine questions of this sort by reference to principles of UK tax law. It follows that the charging of foreign tax upon an amount of income will not of itself be sufficient to establish that income of that amount arose in the foreign territory, and it is necessary to apply principles of UK tax law in order to ascertain the amount of the foreign income. As credit for foreign tax is restricted to the Income Tax or Corporation Tax attributable to the foreign income, this last point is one of some importance.

Note: this statement is as it appears in HMRC’s Statements of Practice (March 2009).