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HMRC internal manual

Banking Manual

Banking surcharge: double tax relief - determining maximum double tax relief available - example


A UK company has a foreign permanent establishment (PE).

  • The company’s trading profits consist of UK profits £1,500,000 and PE profits £1,000,000, which have suffered foreign tax of £300,000 (at 30%).
  • There are losses totalling to £900,000 set against the profits, of which £400,000 arose pre 1st January 2016 and must be added back for surcharge purposes, and £500,000 are losses which arose post 1st January 2016, which do not have to be added back.
  • Group relief of £700,000 is claimed, of which £500,000 is from a non-banking company in the group that must be added back, and £200,000 is from a banking company in the group that does not.

CT Profits

Total profits: £1,500,000 + £1,000,000 - £900,000 - £700,000 = £900,000 @ CT of 20% = £180,000 UK tax.

The limit on credit for foreign tax is £900,000 @ CT of 20% = £180,000

So all of the £180,000 UK CT liability is eliminated and £120,000 (£300,000 - £180,000) of foreign tax is unavailable for credit relief.

Surcharge Position

The pre 1st January 2016 losses of £400,000 and non-bank group relief of £500,000 must be added back to the CT profits of £900,000 for surcharge purposes giving a total of £1,800,000 on which surcharge is applied at 8%.

Here, the whole of the foreign profits of £1,000,000 are in charge, unreduced by any deductions, and so the limit on credit for foreign tax against the surcharge should be £1,000,000 @ 8% = £80,000.

The effect of this is then that £80,000 of the previously unusable foreign tax of £120,000 is now available for credit against the surcharge. The remaining balance of foreign tax of £40,000 is unusable in the current year.

In this example, X (maximum amount of credit relief that may be due against CT of foreign income) is £180,000.

Y (maximum amount of credit relief that may be due against the surcharge on the foreign income) is £80,000.

F (amount of foreign tax) is £300,000.

Here, F (£300,000) exceeds X+Y (£260,000), so the whole amount of Y (80,000) is available as credit against the surcharge levied on the company.

However, if F (say £200,000) is less than X+Y (£300,000) then the credit against the surcharge is restricted to F – X (£200,000 - £180,000) = £20,000 of Y.