LAM09200 - Double Tax Relief: Credit relief restriction where profits calculated on trade basis: overview and general principles TIOPA10/S42 and TIOPA10/S99

Where relief against foreign tax suffered is claimed by way of a credit against corporation tax (CT), the credit relief claimed must not exceed the CT attributable to the income (TIOPA10/S42). In addition to this general restriction, TIOPA10/S99 introduces further specific rules that limit the amount of credit for foreign tax where:

  • an insurance company carries on any category of insurance business
  • the trading basis is used to calculate profits chargeable to corporation tax in relation to the category of business
  • the company has any income or gain where credit for foreign tax can be claimed

The further limitations are:

  • the first limitation, provided by TIOPA10/S100 (LAM09220)
  • the second limitation, provided by TIOPA10/S101 (LAM09230)
  • TIOPA10/S99 does not apply to foreign tax charged on branch profits (LAM09250)

The general approach of section 99 is to look at the computation for each category of business and to prorate expenses and reliefs. In practice, since 1 January 2013, the categories of business are BLAGAB and non-BLAGAB. TIOPA10/S104 applies S97 and S97A (commercial allocation – see LAM05020) to each item of income or gain and the DT arrangements in order to find the fraction of the foreign tax attributable to each category of business.

Using subsidiaries to prevent the restrictions

TIOPA10/S99(4) prevents a scheme or arrangement using a 75% subsidiary of an insurance company, which itself does not carry on insurance business, to circumvent the expenses limitation. It requires that the amount of CT attributable to any item of income or gain arising to the subsidiary is to be found by setting off against that item the amount of expenses that would be attributable to it if that item had arisen directly to the insurance company.

Relief partly by way of credit and partly as an expense

TIOPA10/S99 provides exceptions to the TIOPA10/S31(2)(a) rule that relief for foreign tax cannot be partly given by way of credit and partly as an expense in relation to the same income. Where the amount of credit available is reduced as result of applying the first and second limitations, the difference in the amount of tax may be treated as a deduction (TIOPA10/S99(5)). If S99(4) reduces the credit relief available then the difference in the amount of tax may be treated as a deduction in the 75% subsidiary (TIOPA10/S99(6)).