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HMRC internal manual

International Manual

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HM Revenue & Customs
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UK residents with foreign income or gains: dividends: Determination of rates of foreign underlying tax - Foreign Income computations - dividends received on or after 31 March 2001

The legislation relating to EUFT was repealed for distributions paid on or after 1 July 2009.

Example 1

An Officer has referred a dividend to the Underlying Tax Group (UTG) under INTM164440. The rate of corporation tax is 30%.

The UTG finds out this comes from company A that in turn received a dividend of 51 from company B in a third country. Their computations are:

Company B Relevant profits 51
     
  Tax paid 72
    123
  Mixer Cap (51 + 72) x 30% 37
  EUFT (51 + 72) x 45% = 55 less 37 18
Company A Relevant profits (including 51 dividend from Company B) 100
     
  Further tax paid  
Underlying rate computations Dividend 100
     
  Total tax paid 72
  Actual rate 42%
  Tax credit allowable 37
  Capped rate (to be applied to dividend) 27%

In accordance with INTM164460 the UTG therefore supplies the following:

Dividend 100
   
Actual rate of underlying tax 42%
Capped rate of underlying tax 27%
Amount of Eligible Unrelieved Foreign Tax 18
Foreign Income computation: Dividend 100.00
     
  plus underlying tax  
100/58 x 42 72.00    
      172.00
    Tax at 30% 51.60
    Foreign tax credit  
100/73% x 27% 36.99    
    Net UK liability 14.61

The EUFT can be used against pooled dividends (see INTM164270). It is underlying tax, so can only be used against the Single Related Qualifying Dividend.

Example 2

An Officer refers a second dividend to the UTG. When the dividend is paid, and for the whole accounting period, the rate of corporation tax is 30%. In accordance with INTM164460 the UTG supplies the following:

Dividend 100
   
Actual rate of underlying tax 42%
Amount of Eligible Unrelieved Foreign Tax To be determined by the local tax office
Foreign Income computation: Dividend 100.00
     
  plus underlying tax  
100/58 x 42 72.41    
      172.41
    Tax at 30% 51.60
    Foreign tax credit limited to (100 + 72.41) x 30% because of the Mixer Cap (INTM164220) 51.60
    Net UK liability NIL

(If the rate of corporation tax charged for the AP remains unchanged the mixer cap restriction is the same as the general restriction of credit relief to the amount of UK liability, so it will be unnecessary to do the former calculation).

Eligible Unrelieved Foreign Tax

Under S806B the amount of EUFT is the amount that would be allowed if the rate of corporation tax were as designated in S806J(7) (currently 45%), less the amount already allowed against the dividend. However if:

a) the dividend is unmixed, i.e. does not contain elements from a sub-group of companies;

b) the actual rate of underlying tax is 45% or less

Then the amount of EUFT can be calculated simply by subtracting the amount used against the dividend (51.60) from the actual amount of underlying tax paid (72.41). So EUFT of 20.81 is available to use against pooled dividends (see INTM164210). As this is underlying tax, it can only be used against the Single Related Qualifying Dividend (INTM164270).

Example 3

An Officer refers a third dividend to the UTG. The rate of corporation tax is 30%. In accordance with INTM164460 the UTG supplies the following:

Dividend 100
   
Actual rate of underlying tax 50%
Amount of Eligible Unrelieved Foreign Tax To be determined by the local tax office
Foreign Income computation: Dividend 100.00
     
  plus underlying tax  
100/50 x 50 100.00    
      200.00
    Tax at 30% 60.00
    Foreign tax credit  
(100 + 100) x 30% 60.00    
    Net UK liability NIL

Eligible Unrelieved foreign tax

Under S806B the amount of EUFT is the amount that would be allowed by the mixer cap under ICTA88/S799(1A) (see INTM164240) if the rate of corporation tax were as designated in S806J(7), (currently 45%), less the amount already allowed against the dividend.

The amount that would be allowed under S799(1A) would be:

(Dividend plus Underlying tax) x 30%: i.e. (100 + 100) x 45% = 90.00

The amount allowed against this dividend is 60.00, therefore EUFT available to use against pooled dividends is 30.00 (see INTM164270). As it relates solely to underlying tax it can be used only against the Single Related Qualifying Dividend.