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HMRC internal manual

International Manual

HM Revenue & Customs
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UK residents with foreign income or gains: corporation tax: Apportion deductions

The total profits of the relevant accounting period of a company may be reduced by any of the following:

  1. charges on income,
  2. expenses of management,
  3. losses relievable under CTA10/S37,
  4. group relief, including amounts in respect of a non-trading deficit on loan relationships of the surrendering company which are treated as eligible for group relief under or in respect of a non-trading loss on intangible fixed assets of the surrendering company treated as eligible for group relief (see CTA10/S99).
  5. capital allowances under CAA01/S260(3)
  6. a deficit within Chapter 16 of Part 5 of CTA09 (non-trading deficit on loan relationship
  7. a non-trading loss on intangible fixed assets under CTA10/S104.

Where such total profits include profits, whether income or gains, from more than one source, the company is entitled to allocate those deductions between the various sources of income and gains in such a way as it thinks fit in order to secure the maximum amount of tax credit relief for each doubly taxed source. However, a non-trading deficit on loan relationships may only be allocated under TIOPA10/S42 to the profits against which the deficit is set off in pursuance of the claim under CTA09/S459(1)(a), see TIOPA10/S54 & S55. The full amount of the deductions allowable against the total profits must be apportioned between the various sources and the amount apportioned to any item of income or gain must not exceed the amount of that income or gain as calculated apart from any such deduction.

The same approach should be applied to a non-trading deficit on loan relationships which a company carries forward and sets against non-trading profits for a later accounting period. The company may set the deficit against the various sources of non-trading profits as it thinks fit, but not so as to exceed the amount of any item of profit against which it is set, see TIOPA10/S53.

The correctness of the above approach was confirmed in Commercial Union Assurance Co plc v Shaw (TCL3549 and 3572).