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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: 1998 legislation: Expenditure

For loans within the 1987 legislation, `financial expenditure’ in relation to a loan is defined in ICTA88/S798 (7) to include:

  1. interest or similar sums (whether allowed as a trading expense or relieved as a charge);
  2. the allowable discount, when the loan is funded by means of deep discount securities;
  3. any refund of tax or interest, payment of commission or similar sum paid to the borrower or any connected or associated persons (to the extent that such payment does not otherwise reduce the amount of foreign loan interest) which it is reasonable to regard as referable to the loan or foreign loan interest; and
  4. any amount of any interest or other return foregone by a connected or associated person who provides funds interest free or on terms which are not at arm’s length.

The last item guards against the device of placing the funding costs in one company, while leaving an associated company to claim credit relief in respect of the full amount of the withholding tax suffered (see also INTM168075 -at the end of first paragraph of “Scope of legislation”).

Financial expenditure in relation to income within the 1998 legislation is defined by ICTA88/S798B to include

  1. interest, discounts or similar sums or qualifying losses incurred by the taxpayer or a person connected or associated with him; and
  2. any other sum similarly incurred which it is reasonable to regard as attributable to earning the interest or dividend.

The qualifying losses in (a) are net of any relevant qualifying gains.