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HMRC internal manual

Company Taxation Manual

Shadow ACT: utilisation of: Double Taxation Relief

Where foreign tax falls to be allowed in accordance with ICTA88/S797, the limit is calculated in that way only in relation to so much of the profits as do not include income or gains in respect of which relief for foreign tax is due (the relevant income or gain).

As far as the ‘relevant income or gains’ are concerned, the limit is the lesser of:

  • the limit calculated as described, on the basis that the relevant income or gain were the company’s only income or gain for the relevant accounting period, and
  • the amount of CT for which, after taking account of the reduction for foreign tax, the company is liable in respect of that income or gain.

Example 1

  • The company’s total liability is £100,000 at 30% = £30,000.
  • There is no foreign income or gains.
  • It has unrelieved surplus ACT to use of £50,000.
  • It has no shadow ACT brought forward.
  • It has paid a dividend of £60,000.
  • Its capacity is £20,000.
  • Shadow ACT to be set against that capacity = £15,000.
  • Set off of unrelieved surplus ACT £5,000.

Example 2

  • Income or gains in respect of which foreign tax due (relevant income or gains) £100,000.
  • Other income or gains £200,000.
  • Foreign tax to be set against CT liability £25,000.

Capacity

  • Relevant income or gains: the lesser of amount of shadow ACT treated as paid on a distribution which, together with shadow ACT thereon, is equal to relevant income or gains (£100,000) £20,000.
CT on relevant income or gains (£100,000) £30,000  
     
Less foreign tax £25,000  
  £5,000  
Plus amount of shadow ACT treated as paid on a distribution which, together with ACT thereon, is equal to other income or gains £40,000  
Total £45,000