SolvedGIM12280 | Double taxation relief: foreign tax on investment income: accounting periods beginning on or after 1 April 2000: section 804C ICTA 1988: the second limitation: example
From HM Revenue & Customs · General Insurance Manual
The following example illustrates the application of ICTA88/S804C (4).
| Foreign Income on which foreign tax suffered | 1000 |
|---|---|
| Foreign Tax Suffered | 100 |
| Total Income | 125,000 |
| Total Relevant Expenses | 108,000 |
| Case I Profit after losses before deduction for foreign tax | 180 |
| Rate of Corporation Tax | 30% |
| The Appropriate Fraction is 1000/125,000 = | 0.008 |
| So the Attributable Expenses are 108,000 x 0.008 = | 864 |
| Relevant Income after First Limitation = 1000 - 864 = | 136 |
So, but for section 804C(4), the credit relief would be 30% of £136 = £41. However, that would leave foreign tax of £59 of foreign tax to be expensed, reducing the Case I profit to £121, which is less than the relevant income of £136. And the corporation tax on this would be £36, which is less than the credit relief computed above. So section 804C(4) comes into play.
The section 804C(4) limitation computed in accordance with the formula in GIM12260 is:
C = [(P-Y)/(1-R)] = [(£180-£100)/1-0.3] = £114
The corporation tax attributable to a relevant amount of £114 is £34 and this is therefore the credit relief available. So the amount of foreign tax to be expensed in the Case I computation is now £100 - £34 = £66 and the Case I profit is £180 - £66 =£114. The corporation tax on this is £34 which is exactly covered by the credit relief for foreign tax.