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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: 1998 legislation: Second credit limit

For loans within the 1987 legislation ICTA88/S798 provides a further rule limiting the amount of credit relief available for set-off against the bank’s liability to Corporation Tax in respect of its trading income. The rule operates by providing a calculation for this purpose only of the income arising from the loan, by reference to which the Corporation Tax attributable to that income falls to be computed. The calculation proceeds from the amount of the income as adjusted for excess foreign tax (see INTM168110) and for tax `spared’ (see INTM168120) and involves a deduction for such financial expenditure incurred by the bank in making the loan as is properly attributable to the period for which the interest giving rise to the credit relief was paid. There are thus two stages to the calculation. The financial expenditure has first to be identified and quantified, and second to be attributed to and deducted from each receipt arising on the loan. The Corporation Tax on the income thus computed provides the second limit to the credit relief available, which is applied when it is less than the amount calculated under the first limit (see Examples in INTM168210). Similar rules apply for interest within the 1998 legislation, although in such cases the scope of `financial expenditure’ is wider (see INTM168140).