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HMRC internal manual

International Manual

UK residents with foreign income or gains: double taxation relief: Deduction instead of credit

It may sometimes be to the taxpayer’s advantage not to make a claim to tax credit relief, for example where a business’s trading profits are wholly covered by capital allowances so that there is no Income Tax or Corporation Tax payable on those profits, or where the trading results show a loss. If, for any reason, tax credit relief is not claimed, the foreign tax paid must be deducted from the income from the foreign source in computing the amount of the income for UK tax purposes (TIOPA10/S112-115). This may serve to create or increase a loss which can be dealt with under the normal provisions for losses.

Section 112 refers to `any sum which has been paid in respect of non-UK tax’ on income. This means tax alone and not, for example, interest paid in the foreign country for late payment of the foreign tax. Nor may a deduction be allowed for `tax spared’ (INTM161270) as it is not tax which has been paid; nor for underlying tax (INTM164060 and INTM164360) as it is not paid on the dividend in question; nor for taxes similar to UK VAT (see, however, INTM161080). Refer to CSTD Business, Assets & International Base Protection Policy Team, any case where it is not clear that the tax for which a deduction is sought under Section 112 is a tax on income.

Section 112 allows a deduction for foreign tax paid on income `in the place where the income arose’. Refer to CSTD Business, Assets & International Base Protection Policy Team, any case where a deduction is sought for foreign tax paid on income which arises wholly or partly from work carried out in the UK.

Some foreign taxes, if not deductible under sections 112 to 115, may still be allowable expenses in computing the profits of a trade or profession (see INTM161080BIM45900 onwards).

There are special rules relating to the deduction of foreign tax for life insurance companies, including overseas life insurance companies - see the Life Assurance Manual.