LAM09240 - Double Tax Relief: Credit relief restriction where profits calculated on trading basis: example

This example is based on the double tax relief computation in the example tax computation in LAM Chapter 8 diagram and focuses on credit relief for non-BLAGAB foreign income.

TIOPA10/S42 general limitation

Under the restriction in TIOPA10/S42 the credit relief claimed in respect of foreign income must not exceed the corporation tax attributable to that income. Table B3 from the example tax computation (below) splits relevant non-BLAGAB income into that from overseas shares and from overseas debentures, then shows the foreign tax paid (row C) on that income and the rate of foreign tax (row D). Focusing on the income from overseas shares (i.e. relevant income of £100), as the foreign tax of £15 does not exceed the corporation tax attributable to that income (row E), there is no restriction under TIOPA10/S42 (no excess tax in row F).

B3 – Foreign income - Non-BLAGAB

A	Source	Overseas shares	Overseas preference shares	Overseas debentures	Total
B	Relevant income	100	18,997	283,800	302,897
C	Foreign tax	15	4,749	2,838
D	Rate	15%	25%	1%
E	Foreign tax to 20.25%	15	3,847	2,838
F	Excess foreign tax	0	902	0
G	Appropriate fraction of relevant expenses (TRE x RI/TI)	67.37	12,798	191,196
H	Income above expenses TIOPA10/S100	32.63	6,199	92,604
I	Relevant fraction of profits	-276	-524	-7,740
J	Income restricted to profits TIOPA10/S101	0	0	0
K	Maximum creditable tax	0	0	0
L	Actual creditable tax	0	0	0	0

TIPOA10/S100: First (expenses) limitation

The items relevant to the calculation of total income for the purposes of the first (expenses) limitation (LAM09230), allocated on a commercial basis (and are not identifiable elsewhere in the computation), are:

	Non-BLAGAB
Premiums	1,500,000
Investment income	500,000
Change in DAC	- 100,000
Expenses non-acquisition	- 45,000
Claims	- 1,235,000

Investment income includes the foreign income in respect of overseas shares of £100 in Table B3 above, on which foreign tax is £15.

Total relevant expenses (TRE) = £45,000 (expenses) + £1,235,000 (claims) = £1,280,000

The appropriate fraction per TIOPA10/S100 is:

Relevant income (£100)

TI = £1,500k (premium) + £500k (inv inc) - £100k (change in DAC)

= 100/1900k

= 0.005

The expenses attributable to relevant income is therefore TRE x the appropriate fraction, £12,798 x 0.005= £67.37 (shown in row G of table B3 above)

The amount of relevant income as reduced by the first (expenses) limitation is £32.63 (i.e. £100-£67.37), which is shown in row H.

TIOPA2010/S101: second limitation

The second 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 this applies, the relevant income is further reduced (but not below nil) to an amount equal to that fraction of those profits (LAM09220).

The relevant fraction applied to the profit is:

RI = the relevant income

The referable share of total relievable income and gains in respect of which credit for foreign is to be allowed

From table B3 above, RI is £100 in respect of non-BLAGAB income from overseas shares.

Also from table B3 above, “The referable share of total receivable income and gains in respect of which credit for foreign is to be allowed” (before any reduction in accordance with the first limitation) is £302,897. Therefore the relevant fraction is:

£100/£302,897 = 0.033%

From A5 in the example computation in Chapter 8, there is a non-BLAGAB trade loss of £5,605.

The relevant fraction of the profit is 0.033% x (£5,605) = £(1)

As the relevant income after the first limitation, £32.63, exceeds the relevant fraction of profits, £(1), RI is reduced to nil. Therefore, the amount of creditable tax in Rows K and L is also nil.