INTM165100 - UK residents with foreign income or gains: income tax: Cessations after 1998 - example 1

A Case V trade is set up and commenced on 1 January 1990. The assessments for the years 1989-90 to 1991-92 include additional tax credit relief of 2,000.

The assessment for 1996-97 is made on 50 per cent of the profits of the two years ended 31 December 1996 (FA94/SCH20/PARA6 (2)). Those profits had suffered foreign tax of 3,000.

Assume that, if there had been no averaging for 1996-97, only 2,800 of the foreign tax would have been allowed as tax credit relief (because, perhaps, the rate of foreign tax exceeded the taxpayer’s UK marginal rate). Following averaging of the profits, the amount actually allowed in 1996-97, restricted to the amount of UK tax chargeable on the profits, is 1,300.

The business ceases in 1999-2000.

To determine whether it is necessary to recover any part of the additional tax credit given under the PY rules a comparison is made of

  1. the additional tax credit relief allowed in the years of commencement, and
  2. the amount of foreign tax which would have been allowable for 1996-97 if there had been no averaging, less the amount which was actually allowed for 1996-97 (£2,800 - £1,300 = 1,500).

(a) = £2,000; (b) = £1,500; (a) exceeds (b) and therefore there will be a recovery of £500 tax by means of a charge under Case VI. Assuming that the basic rate of tax is 25 per cent, the taxpayer will be treated as having received a payment of 2,000 chargeable under Case VI. The £2,000 does not form part of his total income for any other purpose of the Taxes Acts, nor is it available to cover charges.

If, in the above example, the foreign tax credit not allowed in 1996-97 had been 2,500 rather than 1,500, the comparison would have been

(a) = £2,000; (b) = £2,500; and (b) is greater than (a).

In these circumstances, no recovery is required and the excess £500 is not available for tax credit relief in any year.