LAM09220 - Double Tax Relief: Credit relief restriction where profits calculated on trading basis: second limitation TIOPA10/S101
The expenses limitation (see LAM09210) only reduces the income by what might be regarded as direct expenses: primarily the outgoings represented by the liability to policy holders which may increase in proportion to the income received.
The second limitation ensures that foreign tax on relevant income is not creditable at all against corporation tax where there is no, or a very limited amount of, trade profit. This could be due to the deduction of indirect expenses or set off of losses brought forward (TIOPA10/S101).
The limitation applies where:
- the amount of the relevant income after any reduction under the first limitation exceeds
- the relevant fraction of the profits of the category of business, after the set off of any brought forward losses
Where the limitation applies, the relevant income is further reduced (but not below nil) to an amount equal to that fraction of those profits (TIOPA10/S101(1)).
The relevant fraction to be applied to the profit (TIOPA10/S101(2)) is:
RI = the relevant income
the referable share of total relievable income and gains
Where:
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.
The referable share of total relievable income and gains is the sum of all income and gains for the period referable to a particular category in respect of which credit for foreign tax is to be allowed (before any reduction required by the first or second limitations).
Strictly, TIOPA10/S101 applies on an item by item basis, so that the credit relief in respect of any item is limited to the corporation tax on the proportion (the relevant fraction) of the trade profit that the item bears to the total of all the items in the computation that have borne foreign tax. However, in most cases a calculation using aggregate amounts will produce the correct answer. Items of income taxed at the same rate of foreign tax can always be aggregated and there should be no problem where the trade profit is significantly larger than the total foreign income attributable to the category of business as limited by the first limitation. In other cases care will be required.
Any restriction to the amount of credit relief available against corporation tax under TIOPA10/S101 will increase the amount of foreign tax deductible as an expense. To avoid iteration the S101 limitation, C, can in most cases be calculated as follows:
C = (P – B)/(1 – R)
Where:
R is the rate of corporation tax
P is the trade profit (or the relevant fraction of the profit) before any deduction for foreign tax other than that which can only be expensed
B is the foreign tax on the relevant income