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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: income tax: Cases I/II example

See INTM168000 onwards for rules to calculate the tax credit due where foreign tax is paid on income taken into account as a receipt of a trade.

The profits of a continuing business within Case I/II are

12 months to 30 September 1994 £15,000 (assessed 1995-96 (PY))

18 months to 31 March 1996 £21,000 (including foreign source profits of £10,000, foreign tax paid £2,000)

12 months to 31 March 1997 £27,000(including foreign source profits of £8,000, foreign tax paid 1,600)

The `appropriate percentage’ for 1996-97 is 40 per cent (12/30 months). Therefore the assessment for 1996-97 is:

40% x (£21,000 + £27,000) = £19,200 (Para 2(2), Sch 20)

The foreign source component of the assessed profits is:

40% x (£10,000 + £8,000) = £7,200 (Para 10(4), Sch 20)

and the foreign tax attributable to this element is:

40% x (£2,000 + £1,600) = £1,440 (Para 10(2), Sch 20)

If the profits are chargeable at 25 per cent, the net tax liability will be:

£19,200 at 25% = £4,800 less tax credit relief £1,440 (being less than the UK tax on 7,200 at 25%) = net tax payable £3,360.

The balance of the foreign tax paid (that is (£2,000 + £1,600) less £1,440 = £2,160) goes unrelieved and cannot be repaid or set against UK tax on income from any other source. Nor can it be deducted under ICTA88/S811 in computing the amount of the income chargeable to tax.