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HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
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UK residents with foreign income or gains: corporation tax: Loan relationships: matching of income and relief

One of the principles governing the allowance of tax credit relief is that the foreign tax is credited against the UK tax which is computed by reference to the same income by reference to which the foreign tax is computed (INTM161140 paragraph (a)). If a company uses an authorised accruals basis for accounting for interest received an interest receipt may be shown as accruing, and hence it may be taxed in the UK, in more than one accounting period. The foreign tax charged on the interest when it is paid has to be apportioned accordingly between the different accounting periods in which the interest is taxed in the UK.

For example, interest of 100 received during year 2 after payment of foreign tax at 10 per cent may be shown in the accounts as accruing 60 in year 1 and 40 in year 2. Foreign tax of 6 should be credited against the UK tax on interest of 60 accrued in year 1; and foreign tax of 4 should be credited against the UK tax on interest of 40 accrued in year 2. See INTM167180 onwards and INTM168000 onwards for additional rules that apply to the calculation of credit relief for foreign tax on interest.

Under TIOPA10/S19 a company has four years (until 31 March 2010 the time limit was six years) in which to claim credit relief from the end of the accounting period for which the interest is charged to UK tax (or if later one year after the end of the accounting period in which the tax is paid). In the above example, credit relief for the foreign tax paid in year 2 must be claimed not later than four years from the end of year 1 so far as the claim relates to that year and not later than four years from the end of year 2 so far as the claim relates to that year. See also INTM162560.

If credit relief is not claimed, the foreign tax paid in the above example should be treated under TIOPA10/S112 (INTM161050) as reducing proportionately the gross amounts of the interest that are brought into account for year 1 and year 2 respectively.