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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: Cessations after 1998 - example 2

Suppose the business considered at INTM165070 ceases on 31 December 2010. The profits for the final twelve months are £9,000 on which foreign tax of £1,800 has been paid. Assume that, if no adjustments were due for overlap relief, the foreign tax available for credit relief in 2010-11 would be £1,800.

Overlap relief of £3,000 is available. The additional tax credit relief allowed on the overlap profits (and therefore potentially recoverable) was £600.

Assessable profits are:

2010-11 £9,000 (ITTOIA 2005/S202) less overlap relief (£3,000) (Section 220) = Total £6,000

To calculate the additional tax relief to be recovered compare

  1. the amount of the additional tax credit relief originally allowed in respect of the overlap profits, and
  2. the amount of tax credit relief which would have been allowable for 2010-11 if no overlap relief were due.

(a) = £600; (b) = £1,800; and (b) is greater than (a).

The additional tax credit relief is recovered in full by restricting the tax credit relief for 2010-11 to a maximum (subject to the usual rules) of 1,200 (1,800 less 600).

If the foreign tax paid in the final period had been 400 rather than 1,800, the comparison would have been:

(a) = £600; (b) = £400; and (a) is greater than (b).

In this case the additional tax credit relief cannot be recovered in full simply by restricting the tax credit relief due for 2010-11. Full recovery is only possible by

  • reducing the tax credit relief for 2010-11 to NIL (£400 less £400), and
  • recovering the remaining 200 by means of a tax charge.

As the basic rate of income tax for 2010/11 is 20 per cent, the taxpayer will be treated as receiving a payment of 1000 chargeable to tax. This 1000 will not form part of the taxpayer’s income for any other purpose.