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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: Examples

Example 1: Allocation of overheads

In respect of patent rights held by a company, gross foreign royalties of 100 are received in an accounting period and no direct expenses are incurred. For the whole of the Case I trade, profit before deduction of interest and overhead expenses are 1000, overhead expenses are 250 and interest 200.

An allocation of overheads and interest should be made on an appropriate basis, which we take here to be in proportion to profits before deduction of these expenses, which gives:

100/1000 X 450 = 45

The net profit attributable to the receipt of the royalty is therefore 100 - 45 = 55. If tax is paid at 30%, the maximum credit relief that may be given in respect of tax deducted from the royalty is 30% of 55 = 16.5

A shareholding is valued at 1000 at the start of an accounting period. During the period, a foreign dividend of 100 is received with tax withheld of 10; a further acquisition of 500 is made; a second dividend of 200 is received with tax withheld of 20; a sale is made realising proceeds of 600; and at the end the remaining shares are worth 800. Other expenses attributable to the holding are 150.

The net profit is given as follows:

  Opening stock 1000
  First dividend 100
  Acquisition 500
  Second dividend 200
  Sale 600
  Closing stock 800
  Other expenses 150
  Net profit 50

Therefore the limit on credit is 50 @ 30% = 15. Therefore of the tax withheld of 30, credit should be limited to 15.