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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitations on credit: TIOPA10/S45(1) and (2): anti-avoidance: trade income

TIOPA10/S45(1) is designed to prevent companies from avoiding the effect of TIOPA10/S44 (see INTM168010 and INTM168020) by arranging for items of income which would be trade income chargeable under CTA 2009/Part 3 if received by them, to be received by another company in whose hands it is taxed as investment income. The intended result of such an arrangement is to separate the foreign income from the expenses of earning it and thus secure that the amount of foreign tax that can be set against the foreign income is not more than the amount of UK tax attributable to that income.

The rules prevent this by requiring that where there is a scheme or arrangement, a main purpose of which is to produce this result, and under the scheme or arrangement an item of the foreign trade income of a person (A) is to be received by another person (B) in the form of investment income, that income is to be treated for the purposes of calculating the credit relief available as if it were trade income of B. This means that trade expenses must be deducted from it and this will include, under TIOPA10/S44(3) to (5), any relevant expenses incurred by A (or any other company) as far as they are reasonably attributable to the income or gain. This treatment only applies for the purposes of calculating the available credit and does not alter the calculation of B’s taxable income.

Since the 2005 legislation was introduced, there have been attempts to get around the rules which are now found in S44.

Although HMRC believes that S45(1) (formerly ICTA88/S798B(4)) is working effectively to prevent abuse, the new legislation at S45(2) amends the existing rules to put it beyond doubt that any income received, for example, by an investment company associated with a bank, which it is reasonable to assume would have been trade income if it had been received by the bank, is to be treated for the purposes of S44 as trade income of the investment company.

For guidance on the rules introduced in Finance Act 2009, see INTM168023.