MTT25200 - Calculating the effective tax rate: Covered tax balance: Amounts to be excluded

The following amounts are to be excluded from the covered tax balance, in accordance with section 175 of Finance (No.2) Act 2023:

  • any amount that relates to income or gains that are not included in the adjusted profits of the member with the qualifying current tax expense.
  • any amount relating to an uncertain tax position.
  • any amount of credit or refund in respect of a qualifying refundable tax credit that reduces the qualifying current tax expense (see MTT21410).
  • any amount of credit or refund in respect of a marketable transferable tax credit (see MTT21420).
  • any amount that is not expected to be paid within three years of the end of the accounting period.
  • any amount allocated to another group member under a provision of MTT.
  • excluded amounts relating to a blended CFC regime (see MTT25510).

Tax expense reallocated to a CFC

Where an amount of qualifying current tax expense in respect of a controlled foreign company (CFC) regime is reallocated to a CFC from the owner of a CFC (see MTT25500), the related income should be treated as included in the adjusted profits of the CFC, rather than the owner, for the purpose of determining whether the amount should be excluded.

In some cases, an amount that would otherwise be reallocated to a CFC remains with the owner of the CFC due to the cap on amounts relating to mobile income. In this case, the amount of tax expense is to be excluded from the covered tax balance of the owner of the CFC if the related income or gains are not included in the adjusted profits of the CFC. The amount is then excluded from the covered tax balance of both the CFC and its owner.

This is set out in section 179(1A), 179(3A) and 179(3B) of Finance (No.2) Act 2023.

Example

Under a CFC regime that is not a blended CFC regime, C Ltd has a controlled foreign company (F Ltd).

C Ltd has 100 of qualifying current tax expense that is to be reallocated to F Ltd under the provision. However, 40 of this amount relates to mobile income, and the cap on amounts relating to mobile income is 25. This means that only 75 of the qualifying current tax expense is reallocated to F Ltd.

The 75 that is reallocated to F Ltd will be excluded from its covered tax balance if the income or gains to which that amount relates is not included in the adjusted profits of F Ltd.

Similarly, the 25 that remains with C Ltd will be excluded from the covered tax balance of C Ltd if the income or gains to which that amount relates is not included in the adjusted profits of F Ltd.

Tax expense reallocated to a hybrid or flow through entity

Where amounts of qualifying income tax expense are reallocated to a hybrid or flow-through entity, a special rule applies when determining if the amount should be excluded on the basis that the related profits or gains are not included in the adjusted profits of the member.

The tax expense is to be excluded if the profit or gain would not be included in the adjusted profits of the member from which the tax expense was allocated, even if the profit or gain was not excluded. In other words, it is to be excluded if the profit or gain is not reflected in the underlying profits accounts of the entity from which the expense was allocated.

This is set out in section 178(1A) and 178(1B) of Finance (No.2) Act 2023.

Tax expense reallocated to a permanent establishment

Where qualifying current tax expense is reallocated to a permanent establishment (see MTT41040), it should be treated as qualifying current tax expense for the purpose of determining whether it should be excluded on the basis that it relates to income or gains not included in the adjusted profits. In other words, the income or gains relating to the reallocated tax expense should be included in the adjusted profits of the permanent establishment, or the tax expense should be excluded.

This is set out in section 177(1) of Finance (No.2) Act 2023.