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Withholding tax is shown on dividend vouchers and relates directly to that income, but foreign tax paid on business profits or on property income is paid at various times during a year or even after the tax liability has been ascertained. Furthermore, foreign taxes are not always paid at regular intervals and overpayments may arise in later years.
Is there any clear guidance about which tax payments are to be claimed or matched to establish the annual claim for foreign tax credit relief against the UK tax liability when completing a UK self-assessment tax return? In particular, can readers advise on how to take into account our UK fiscal year end compared with the fiscal year ends of foreign countries and their tax payment dates?
Advice from Taxation readers on this subject in general would be illuminating.
Query 18,007 – Matched Payments.
Reply by J.McLean
The general principle is that income and deductible expenditure should be matched against the UK tax year in which they arise, and this is no exception. Where income or expenditure derives from a source in respect of which there is a mismatch between the financial year and the UK personal tax year running from
6 April to 5 April (and that need not necessarily be a foreign income source, it could equally well be income from a trade in the UK where the books are drawn up on a period which doesn’t coincide with the UK income tax year), the item should be apportioned pro rata over the two UK tax years it spans, and any foreign tax credit must follow the income to which it relates.
This principle may be best illustrated by way of example. Assume a UK resident individual receives gross income of £100,000 in 2011 from a foreign trade in respect of which the financial year follows the calendar year and on which foreign tax of 20% falls due. This should be regarded as gross taxable income of £26,000 (95 days pro rated income) for tax year 2010/11 and of £74,000 for 2011/12, with foreign tax of £5,200 attributable to 2010/11 and £14,800 to 2011/12.
Your original correspondent is, of course, correct that practical problems may arise where foreign taxes are paid in arrears, but the following points should be borne in mind:
(a) the UK self-assessment deadline
falls on 31 January of the year after the end of the tax year of assessment (i.e. filing deadline for 2010/11 was 31 January 2012), which will in many cases allow time for the relevant creditable foreign tax liability to be calculated; and
(b) income tax assessments may be reopened up to four years after the end of the tax year in question.
Accordingly, to the extent that the timing of foreign tax payments results in double taxation because the foreign tax falls due after the self-assessment return has been filed and the associated UK tax paid, the taxpayer is entitled to submit a claim for repayment of the overpaid UK tax. The net disadvantage to the taxpayer should then become one of cashflow only and, in this practitioner’s experience at least, such claims for recovery of overpayments are generally handled relatively swiftly by HMRC, any delays generally resulting from the time taken for the foreign jurisdiction to produce a certificate of payment to support the claim.
Reply by Little Bird
The query seeks clarification of how to allocate foreign tax payments to UK tax years. HMRC’s International Manual gives clear advice at INTM161220. Tax deducted at source can generally be easily allocated to years by reference to the date on which the income was received.
Unfortunately, income taxed by reference to a basis year, such as business profits or rental income, cannot be so easily allocated because of the unusual dates of the UK tax year.
The guidance states that where foreign taxes are paid by reference to income received in a year the tax is allocated by apportioning the income between the UK tax years as they coincide with the foreign tax period. The guidance gives the following example:
‘Many foreign countries adopt the calendar year as their basis period so that, for example, foreign rents of the year ended 5 April 2010 will be charged to foreign tax partly in 2009 and partly in 2010. Three-quarters of the 2009 tax and one-quarter of the 2010 tax will be available for credit against the UK tax charged for 2009/10.’
On that basis the steps required would be as follows.
- Identify the foreign tax period during which the income to be taxed arises.
- Identify the foreign tax paid for that period.
- Split the foreign income and foreign tax between the UK tax years on the above apportionment basis.
Where foreign taxes are paid late the only solution is to use the statutory provisions for amending open returns or making a claim for overpayment relief under FA 2009, s 100 and Sch 52 of that same act. This should cover most scenarios.
