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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: FA05/S86 - Foreign Income

TIOPA10/S44(2) amends meaning of “relevant income” in section 42(1) and (2), to make clear that it refers only to so much of the taxpayer’s income that relates to the foreign tax payment. This prevents the foreign tax being set against unrelated income.

Where expenses are allowed in the calculation of the amount liable for tax, section 44(3) to (5) requires those expenses to be taken into account in calculating the relevant income.

If income is taxed without deduction of expenses (such income is often referred to as “pure income profit”), then there are no expenses to set against the income, so section 44(3) to (5) has no effect.

TIOPA10/S52 makes it clear that management expenses and other expenses that can be set against more than one source of income may be allocated against sources according to the taxpayer’s choice. Section 44 does not override section 52 and so there is no requirement to set such expenses against foreign income.

Therefore foreign income that represents pure income profit, including foreign dividend income that is not received by way of trade, is not affected by section 44.

Income from a foreign trade is also taxable, and trade expenses should be taken into account in determining the DTR available in such cases. It is also possible that trade income might be diverted to another company where it falls to be taxed. Such income would not represent “pure income profit” and so expenses would be allocated under section 44(3) to (5).