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HMRC internal manual

General Insurance Manual

Double taxation relief: foreign tax on investment income: accounting periods beginning on or after 1 April 2000: section 804C ICTA 1988: the second limitation: example


The following example illustrates the application of ICTA88/S804C (4).

Foreign Income on which foreign tax suffered 1000
Foreign Tax Suffered 100
Total Income 125,000
Total Relevant Expenses 108,000
Case I Profit after losses before deduction for foreign tax 180
Rate of Corporation Tax 30%
The Appropriate Fraction is 1000/125,000 = 0.008
So the Attributable Expenses are 108,000 x 0.008 = 864
Relevant Income after First Limitation = 1000 - 864 = 136


So, but for section 804C(4), the credit relief would be 30% of £136 = £41. However, that would leave foreign tax of £59 of foreign tax to be expensed, reducing the Case I profit to £121, which is less than the relevant income of £136. And the corporation tax on this would be £36, which is less than the credit relief computed above. So section 804C(4) comes into play.

The section 804C(4) limitation computed in accordance with the formula in GIM12260 is:

C = [(P-Y)/(1-R)] = [(£180-£100)/1-0.3] = £114

The corporation tax attributable to a relevant amount of £114 is £34 and this is therefore the credit relief available. So the amount of foreign tax to be expensed in the Case I computation is now £100 - £34 = £66 and the Case I profit is £180 - £66 =£114. The corporation tax on this is £34 which is exactly covered by the credit relief for foreign tax.