INTM167480 | UK residents with foreign income or gains: corporation tax: Intangible fixed assets: examples

Example 1
Example 2

Example 1

Assume that for its accounting period ending 31 December 2010 a company has foreign royalties from its intangible assets, which count as non-trading items, of £1000 which have borne foreign tax of £100, domestic profits (say Property Income) of £2000 and non-trading outgoings of £2500. The company makes a claim under CTA09/S753 (CIRD13540) to set off its non-trading loss of £1500 (£1000 - £2500) against its total profits for the accounting period. The corporation tax due before double taxation relief is therefore 28% x £500 (£2000 - £1500) = £140.

Solely for the purpose of calculating the UK tax attributable to the non-trading royalties, section 51 permits the company not to have to set off the non-trading outgoings against the non-trading royalties. Instead it can allocate them as it sees fit.

So, in the example above, it could allocate £2000 of the £2500 against the property income profit. But it would still have to allocate the remaining £500 to the foreign royalties of £1000. The result would be that all the corporation tax payable for the accounting period (£150) would be attributable to the non-trading royalties of £500, that is the gross royalties of £1000, reduced by the £500 mentioned above. Since in this case the corporation tax which must be allocated to the royalties of £500 (£500 @ 28%) exceeds the foreign tax on those royalties (£100), the company would be able to reduce its corporation tax bill by the whole of the £100.

Without the provisions in TOPIA10/S51 the corporation tax referable to the royalties would be nil (because they are completely extinguished by part of the non-trading outgoings) and therefore none of the foreign tax on that credit could be set against the corporation tax payable.

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Example 2

Assume that for its accounting period ending 31 December 2012 a company has foreign royalties from its intangible assets, which count as non-trading items, of £1000 and that they have borne foreign tax of £100, domestic profits (say Property Income) of £2000 and non-trading outgoings of £3000.

The company does not make a claim under CTA09/S753 (CIRD13540) and cannot therefore set off its non-trading loss of £2000 (£1000 - £3000) against its total profits for the accounting period. Instead it carries forward the £2000 to the next accounting period. It may choose to do so for example because it is liable only to the small profits rate for the current period but expects to be liable at the full rate in future. The corporation tax due before double taxation relief is therefore 20% x £2000 (the Property Income) = £400.

In these circumstances the company need not allocate the non-trading outgoings carried forward (£2000) for the purpose of calculating the corporation tax referable to the foreign royalties. For that purpose it merely has to allocate the outgoings not carried forward (£1000). It does so against the Property Income (£3000) reducing it to £1000 and so, for the purpose of credit relief, it is able to regard the taxable profit of £2000 to be composed of £1000 of property income and £1000 of royalties.

Since the corporation tax which must be allocated to the royalties is £200 (£1000 @ 20%) the whole of the foreign tax (£100) can be relieved by way of credit.

Without this facility for reducing the non-trading outgoings by the non-trading loss carried forward the company would have had to allocate the whole of the £3000 of non-trading outgoings against its profits for the period. Only £2000 could have been set against the Property Income and it would have been compelled to set the balance against its royalties. No corporation tax would therefore have been referable to the royalties and no credit relief for the foreign tax would have been due.