LAM09210 | Double Tax relief: Credit relief restriction where profits calculated on trading basis: first limitation TIOPA10/S100

The first limitation on credit relief reduces relevant income or gains on which foreign tax has been paid, by the amount of expenses attributable to the income (TIOPA10/S100). Relevant income cannot be reduced below nil to create a loss or relief.

The main object of the first (expenses) limitation is to ensure that foreign tax is only creditable against corporation tax chargeable on the part of the trade profit which the relevant item of income has contributed to the overall pot.

The amount of expenses attributable to the relevant income is the appropriate fraction of the total relevant expenses (TRE) of the category of business for the period, and that fraction is provided at TIOPA10/S100(3) as:

RI = the relevant income
TI = the total income of the category of business

If the total income of the category is nil then TI becomes the total of all the relevant income of the company for the category concerned (TIOPA10/S100(4)).

RI is the amount of the income or gain for the period referable to the category of business (before any reduction required by the first or second limitations) to which the foreign tax relates.

TI is the total incomings less the total outgoings of the category of business for the period as defined in TIOPA10/S103 (see LAM09240).

The first limitation – shortcut

Since both total relevant expenses and TI are wholly independent of the amount of income on which tax credit is allowable, or on the amount or percentage of foreign tax, it is possible to apply the first limitation to the totality of income and gains on which any foreign tax falls to be allowed as credit. However it may still be necessary to calculate the reduction for any particular item of income to test whether the foreign tax on that income exceeds the corporation tax attributable to the income as reduced by the first and second limitations. The reduction to be made will always be the same in percentage terms.