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HMRC internal manual

International Manual

HM Revenue & Customs
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UK residents with foreign income or gains: double taxation relief: Deduction instead of credit: FA94/SCH20

Where, under the rules introduced by FA94/SCH20 effecting the transition from the preceding year basis of assessment to the current year of assessment, the amount of foreign income assessed for the year 1996-97 is a proportion of the income or profits of a period of more than twelve months, then any deduction of foreign tax under ICTA88/S811 (now TIOPA10/S112-115) is to be made from the gross profits for that period, before any `averaging’ takes place (FA94/SCH20/PARA13).

For example, suppose the accounts for a continuing business show the following trading profits

  • 12 months to 31 December 1995 - £3,000 (including foreign source profits of £2,000 which have borne foreign tax of £1,000)
  • 12 months to 31 December 1996 - £2,000 (including foreign source profits of £600 which have borne foreign tax of £300)

If tax credit relief is not claimed, the assessment for 1996-97 is half (12/24) of the income of the two years ended 31 December 1996 (FA94/SCH20/PARA2 (2)) computed as follows

£3,000 less £1,000 = net profit £2,000

£2,000 less £300 = net profit

£1,700 1/2 x (2,000 + £1,700) = £1,850