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Company Taxation Manual

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HM Revenue & Customs
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ACT: FID: general: how legislation operated in practice: examples

Example 1

The results of a company for the year ended 31 December 1995 are as below.

Case I £4,000    
       
Chargeable gains (UK) £2,000    
Case V: dividend (gross) from company:      
A £5,000 foreign tax rate 40%  
B £10,000 foreign tax rate 35%  
C £4,000 foreign tax rate 30%  
D £8,000 foreign tax rate 20%  

The company pays FID of £20,000 (ACT £5,000) and ordinary dividends of £10,000 (ACT£2,500).

It surrenders ACT of £1,000 to a subsidiary.

Assume the company is liable to CT at 33%, and the ACT rate is 1/4.

The company’s CT liability must be computed. There are no deductions to be set against foreign source profits (FSP).

  Profit Tax at 33% DTR ACT Set off CT
           
Case I £4,000 £1,320   £800 £520
Chargeable gain £2,000 £660   £400 £260
Case V: dividend (gross) from company:          
A £5,000 £1,650 £1,650    
B £10,000 £3,300 £3,300    
C £4,000 £1,320 £1,200 £120  
D £8,000 £2,640 £1,600 £1,040  
  £2,360 £780      

Matching of FID with distributable foreign profits (DFP).

The FSP brought into charge to tax, and the DFP are:

Dividend from Company A £5,000    
       
less foreign tax £2,000    
equals DFP £3,000 £3,000  
Dividend from Company B £10,000    
less foreign tax £3,500    
equals DFP £6,500 £6,500  
Dividend from Company C £4,000    
less UK tax £1,320    
equals DFP £2,680 £2,680  
Dividend from Company D £8,000    
less UK tax £2,640    
equals DFP £5,360 £5,360  
Total DFP   £17,540  

These figures cannot simply be taken from the CT computation. The foreign tax to be taken into account is the amount paid on the FSP, and not the amount of the double taxation relief (DTR) in the CT computation.

The maximum FID which can be matched are £17,540, and the company elects to match this amount of FID with these DFPs (CTM21320).

Calculation of ACT available for set off or repayment.

ACT is not available if it has already been dealt with (CTM21410). Returning to the CT computation, the ACT that has not been dealt with is £4,140, as is shown below.

ACT paid   £7,500  
       
less ACT set off under ICTA88/S239 (1) £2,360    
less ACT surrendered £1,000 £3,360  
ACT not dealt with   £4,140  

The notional foreign source ACT must then be calculated (CTM21420).

The company elects for FID of £17,540 to be qualifying FID (CTM21430). The ACT which the company would have paid in respect of the qualifying FID is £4,385(£17,540 / 4).

The matched FSP underlying the matched DFP are treated as the profits chargeable to CT, being the dividends from Companies A, B, C and D.

From the CT computation it is seen that ACT of £1,160 would be set off against the CT liability on such profits (£120 on dividends from Company C and £1,040 on dividends from Company D). The notional foreign source ACT is therefore £4,385 - £1,160 = £3,225.

The surplus ACT available for set off or repayment is then the lower of £4,140 and £3,225.

ACT of £780 is set off under ICTA88/S246Q against the remaining CT liability of the period (unless it has already been paid), and the balance of £2,445 (£3,225 - £780) is repaid.

Example 2

This example shows the effect of deductions available.

The results of a company for the year ended 31 December 1995 are as follows.

Case I £4,000    
       
Chargeable gains (UK) £2,000    
Case V: dividend (gross) from company:      
A £5,000 foreign tax rate 40%  
B £10,000 foreign tax rate 35%  
C £4,000 foreign tax rate 30%  
D £8,000 foreign tax rate 20%  

The company receives £15,000 group relief.

The company pays FID of £20,000 (ACT £5,000) and ordinary dividends of £10,000 (ACT£2,500). It surrenders ACT of £1,000 to a subsidiary.

Assume the company is liable to CT at 33%, and the ACT rate is 1/4.

The company’s CT liability must be computed. The company allocates the £15,000 group relief first against UK profits and then against overseas profits which have suffered the least foreign tax.

  Profit Group relief Net profit Tax at 33% DTR set off
           
Case I £4,000 £4,000 nil nil nil
CG (UK) £2,000 £2,000 nil nil nil
Dividend from company:          
A £5,000 Nil £5,000 £1,650 £1,650
B £10,000 Nil £10,000 £3,300 £3,300
C £4,000 £1,000 £3,000 £990 £990
D £8,000 £8,000 nil nil nil

No ACT has been set against CT.

Matching the FID with DFP.

Under the FID rules the company can choose, in determining the FSP, how to allocate its deductions. In theory this can be independent of the allocation chosen in determining DTR but in practice the company will invariably follow the same allocation.

The FSP brought into charge to tax, and the foreign and UK tax suffered, are:

Dividend from Company A £5,000    
       
less foreign tax £2,000    
equals DFP £3,000 £3,000  
Dividend from Company B £10,000    
less foreign tax £3,500    
equals DFP £6,500 £6,500  
Dividend from Company C £3,000    
less UK tax £990    
equals DFP £2,010 £2,010  
Total DFP   £11,510  

The maximum FID which can be matched are £11,510, and the company elects to match this amount of FID with these DFP (CTM21320).

Calculation of ACT available for set off or repayment.

ACT is not available if it has already been dealt with (CTM21410).

If you look back to the CT computation, you will see that no ACT is set off against CT. Of the total £7,500 ACT paid, £1,000 has been surrendered leaving £6,500 which has not already been dealt with.

The next step is to calculate the notional foreign source ACT (CTM21420).

The company elects for FID of £11,510 to be qualifying FID (CTM21430). The ACT which the company would have paid in respect of the qualifying FID is £2,877(£11,510 / 4).

The matched FSP underlying the matched £11,510 DFP are treated as the profits chargeable to CT. These dividends are:

Dividend from Company A £5,000  
     
Dividend from Company B £10,000  
Dividend from Company C £3,000  

In computing the notional CT, where any deduction has been given in reaching an FSP the notional DTR is found by reference to the FSP plus that deduction, so that the usual DTR rules applies. (This is so far accounting periods ending after 28 November 1995 only. For earlier accounting periods, the notional DTR is found by reference to the FSP only. So far an earlier accounting period, if the overseas income is reduced by any deduction, the notional DTR may differ from that in the real CT computation.)

The notional CT liability on dividends A, B and C is fully covered by notional DTR. TheACT that would have been paid on the qualifying FID is £2,877. None is set off against the notional liability so notional foreign source ACT is £2,877.

The surplus ACT which is available for repayment or set off under the FID provisions is then the lower of £6,500 (the ACT that has not been dealt with) and £2,877 (the notional foreign source ACT). No amount can be set off since there is no CT liability after DTR and £2,877 is repaid.

Of the £20,000 FID paid by the company, it has only matched £11,510 (the maximum it could) leaving £8,490 which is capable of further matching.

In the year ended 31 December 1996 the companies’ results are as follows.

Case V: Dividend (gross) from Company E £10,000 foreign tax rate 35%, from Company F £8,000 30% and from Company G £6,000 25%.

The company receives £10,000 group relief.

The company also has a subsidiary whose income consists only of a dividend (gross) of £10,000 from Company H, with a foreign tax rate of 35%. The subsidiary had no overseas income in earlier years.

The company pays a further FID of £5,000, with ACT £1,250. It also has £8,490 unmatched FID of the previous accounting period.

Assume the company is liable to CT at 33%, and the ACT rate is 1/4.

The company’s CT liability must be computed. The company allocates the group relief against overseas profits that have suffered the least foreign tax.

  Profit Group relief Net profit Tax at 33% DTR set off
           
Dividend from Company E £10,000   £10,000 £3,300 £3,300
Dividend from Company F £8,000 £4,000 £4,000 £1,320 £1,320
Dividend from Company G £6,000 £6,000      

The subsidiary of the company also has DFPs arising from the dividend from Company H.

Dividend from Company H £10,000  
     
less foreign tax £3,500  
equals DFP £6,500  

These £6,500 DFP can be treated as eligible profits of the parent and thus available for matching.

The maximum FID which can be matched are therefore £15,680 (£9,180 + £6,500).

The company has an unmatched FID of £8,490 of the previous accounting period, and a £5,000 FID of this accounting period, both of which it elects to match. It elects for the previous period’s unmatched FID of £8,490 to be matched in part with DFP deriving from the dividend from Company E (£6,500) with the remainder matched with DFP deriving from part of the dividend from Company F (£1,990). It also elects for the current period’s FID of £5,000 to be matched with £5,000 of the subsidiary’s DFP.

The parent then has DFP which have not been used for matching of £690 (£2,680 - £1,990) deriving from dividends from Company F, and the subsidiary has unused DFP of £1,500 (£6,500 - £5,000) deriving from dividends from Company H.

Calculation of ACT available for set off or repayment.

ACT is not available if it has already been dealt with (CTM21410). Returning to the CT computation for the period ended 31 December 1996, there is no CT liability after DTR so no ACT is set off against CT. None of the ACT of £1,250 has been dealt with.

The CT position for the period ended 31 December 1995 has been considered above. The £2,877 repayment previously made under the FID provisions must be deducted from the ACT that has not already been dealt with (CTM21410).

Thus ACT of £6,500 - £2,877 = £3,623 has not already been dealt with.

The notional foreign source ACT (CTM21420) must be calculated for the period ended 31 December 1996. It also has to be recalculated for the period ended 31 December 1995, and for each period compared with the ACT that has not already been dealt with.

Notional foreign source ACT for the period ended 31 December 1996.

The company elects for FID of £5,000 to be qualifying FID (CTM21430). The ACT which the company would have paid in respect of the qualifying FID is £1,250(£5,000 / 4).

The matched FSP underlying the matched eligible profits represent part of the dividend from Company H. The calculation for the DFP on this foreign source profit was:

Dividend from Company H £10,000  
     
less foreign tax £3,500  
equals DFP £6,500  

Of the £6,500 available, only £5,000 has been matched against an FID. So the portion of the total DFP available which is matched is £5,000 / £6,500, and the matched FSP underlying the matched eligible profits are £5,000 / £6,500 x £10,000 = £7692.

The £7,692 is treated as the profits chargeable to CT. The notional CT is covered by DTR and so no ACT is set off. The notional foreign source ACT is therefore £1,250.

The surplus ACT that is available for repayment or set off under the FID provisions is then the lower of £1,250 and £1,250. No amount can be set off and so £1,250 is repaid to the company.

Notional foreign source ACT for the period ended 31 December 1995.

The FID previously treated as qualifying FID are ignored (CTM21460).

At the end of the accounting period, the company had £8,490 unmatched FID. It can now elect for this FID of £8,490 to be qualifying FID. The ACT which the company would have paid in respect of the qualifying FID is £2,122 (£8,490 / 4).

The matched FSP underlying the matched DFP are treated as the profits chargeable to CT. These FSP came in the form of £10,000 dividends from Company E and also part of the £4,000 dividends from Company F. The calculation for the DFP on this last foreign source profit was:

Dividend from Company F £4,000  
     
less UK tax £1,320  
equals DFP £2,680  

The portion of the Company F FSP underlying the matched DFP is calculated in the same way as above £1,900 / £2,680 x £4,000 = £2,970.

So the matched FSP underlying the matched DFP amount to £12,970 (£10,000 + £2,970).

In computing the notional CT, where any deduction has been given in reaching on FSP notional DTR is again found by reference to the FSP plus that deduction.

Thus for the dividend of £2,970 from company F the DTR is £1,990 / £2,680 x £1,320 =£980 which equals the notional CT liability on that dividend, and no ACT is set off.

The notional CT liability on the dividend from Company E is also fully covered by DTR.

The notional foreign source ACT is therefore £2,122.

The ACT which is available for repayment or set off under the FID provisions is then the lower of the ACT not already dealt with - £3,623 and the notional foreign source ACT -£2,122. No amount can be set off, so £2,122 is repaid.

Example 3

This shows a reckoning after the end of an accounting period of an international headquarters company (IHC).

For the APE 31 December 1996 a company has the following details.

1 June 1996 FID paid as an IHC £20,000  
       
1 December 1996 FID paid not as an IHC £10,000  
30 September 1996 FID received £15,000  

No FID have previously been received. The company was an IHC in the accounting period ended 31 December 1995. Assume an ACT rate of 25% and a CT rate of 33%.

The company’s only profit chargeable to CT is Case V income £12,000, with foreign tax suffered at 40%.

When paying the first FID the company thinks it will be an IHC throughout the accounting period and does not account for ACT. When paying the second FID, the company realises it is not an IHC. But no ACT is due on the CT61 for the quarter ended 31 December 1996 because there is no excess of FID paid as a non IHC over FID received.

Calculation of Amount A.

Applying the steps at CTM21550:

Total FID paid £30,000  
     
Minus FID received £15,000  
Net FID paid £15,000  
ACT due on FID £3,750  
Minus ACT paid £0  
Amount A £3,750  

Calculation of Amount B.

Amount B is the ACT that would be repaid or set off on a claim under ICTA88/S246N if the company had not treated itself as an IHC at any time in the accounting period.

CT computation:

Case V profits chargeable £12,000  
     
CT £3,960  
Minus DTR £3,960  
CT chargeable £0  
FSP £12,000  
Minus foreign tax £4,800  
DFP £7,200  

The company elects to match the DFP with £7,200 of the FID paid, and elects for thesematched FID to be qualifying FID.

On net FID paid of £15,000, ACT of £3,750 would have been paid.

The ACT that would not have been dealt with is £3,750 because as shown above no amount would be set off in the CT computation (CTM21410).

The notional foreign source ACT is found by applying the assumptions in ICTA88/S246P (CTM21420).

The qualifying FID are assumed to be the only distributions made, with no distributions treated as received.

The ACT that would be due on these qualifying FID is £1,800.

The matched FSP underlying the matched DFP are treated as the profits chargeable to CT.

Notional profits chargeable £12,000  
     
CT £3,960  
Minus DTR £3,960  
CT due £0  

The notional foreign source ACT is £1,800, since there is no set off against the notional CT liability.

The amount that would have been repayable under Section 246N is therefore the lower of £3,750 and £1,800, i.e. £1,800.

This is amount B.

Since amount A exceeds amount B, the excess of £1,950 is treated as an amount of ACT due from the company. The company pays this.

Example 4

This shows a further reckoning following additional matching.

In the next accounting period to 31 December 1997, the company’s income chargeable to CT includes Case V income of £30,000 with foreign tax suffered at 50%.

The company’s DFP for the period deriving from this income are:

FSP £30,000  
     
Minus foreign tax £15,000  
DFP £15,000  

The company paid FID of £30,000 in the previous accounting period. But the maximum amount the company can elect to be qualifying FID is £15,000, because of the FID received. £7,200 FID have been matched with DFPs of the previous accounting period. The company now elects to match £7,800 of those FID with £7,800 of the DFP of 1997, and elects for these FID to be qualifying FID.

Because the company has previously made a payment under ICTA88/S246U (2) in respect of 1996, and has now matched FID paid in 1996 with DFP in 1997, the company is due a repayment.

The repayment is found by recalculating what the 1996 amount A minus amount B payment would have been, if the 1997 matched DFP had been taken into account before calculating that payment.

Amount A in respect of the FID paid in 1996 is unchanged at £3,750. The calculation ofamount B is now reworked.

To find amount B, we find what ACT would be repayable if the company had not treated itself as an IHC at any time in the accounting period.

The ACT that would not have been dealt with for 1996 is still £3,750.

The notional foreign source ACT is found by applying the assumptions in Section 246P (CTM21420).

The qualifying FID are assumed to be the only distributions made, with no distributionstreated as received. The qualifying FID are now £7,200 plus £7,800, totalling £15,000.

The ACT that would be due on these qualifying FID is £3,750.

The matched FSP underlying the matched DFP are treated as the profits chargeable to CT.

The company has matched £7,800 of the 1997 DFP. The foreign tax rate is 50%, so thematched FSP underlying these matched DFP are £15,600.

  1996 matched FSP 1997 matched FSP  
       
Notional profits chargeable £12,000 £15,600  
CT £3,960 £5,148  
Minus DTR £3,960 £5,148  
CT due Nil Nil  

The notional foreign source ACT is £3,750, since there is no set off against the notional CT liability.

The amount that would be repayable is therefore the lower of £3,750 and £3,750, so this is amount B.

Amount A is also £3,750, so the recalculated amount A minus amount B is now nil.

The company is entitled to repayment under ICTA88/S246W of the £1,950 previously paid under ICTA88/S246U (2).