HMRC internal manual

International Manual

INTM163060 - UK residents with foreign income or gains: income arising abroad: Long term contracts

Where a UK enterprise has a long term contract in a foreign country which is being carried on through a permanent establishment there, the profits from that contract may be taxed over different periods in the foreign country and in the UK. For example, a UK company makes a profit of £1m on a contract which extended over five years. In the UK this profit is taxed as follows:

Year 1 nil

Year 2 nil

Year 3 £200,000

Year 4 £300,000

Year 5 £500,000

In the foreign country £200,000 is taxed in each of the five years. In applying the root income' basis (see [INTM161140]( paragraph (a)) in order to determine what credit is due for the foreign tax, the same profits by reference to which the foreign tax is computed’ are the whole profits of the contract and are not necessarily connected with specific UK basis periods. Since the profits are charged to UK tax in years 3, 4 and 5, the total foreign tax may be apportioned in order to give credit against the UK tax in those years, subject to the normal rules about the limitations of credit (see INTM161210 onwards). If, in the example, the whole profits of £1m had been charged to UK tax in year 5, the foreign tax charged in each of the five years would be available for credit in year 5. Where the enterprise has more than one contract in the same country, the foreign and UK taxes attributable to the profits of each contract should be considered separately.