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HMRC internal manual

International Manual

UK residents with foreign income or gains: income tax: Averaged profits

INTM165120 - INTM165170 are historical pieces of guidance and may only be relevant where INTM165090 - INTM165110 apply

FA94 introduced new rules governing the basis of assessment for sources of income within Schedule D. These rules provide for a `current year’ (CY) basis of assessment to apply from 6 April 1997. The assessment of income on the `preceding year’ (PY) basis does not apply for years after 1995-96. 1996-97 is a transitional year, for which special rules are contained in FA94/SCH20.

For most sources of income which commenced prior to 6 April 1994 and which continue beyond 5 April 1998, the assessment for 1996-97 is based upon a twelve months average (known as `the appropriate percentage’) of profits of a period longer than twelve months.

Where the 1996-97 assessment is arrived at by averaging the profits of a period of more than twelve months

  • the amount of any foreign source income included in the overall profits of that period, and
  • the amount, if any, of foreign tax paid in respect of that income

are both averaged, on the same basis as the profits, to determine the tax credit relief allowable against the UK tax on the profits assessed for 1996-97.

These rules will apply in any other situation where profits for a period are determined by averaging.

See INTM165150 onwards for examples.