INTM164470 - UK residents with foreign income or gains: dividends

Determination of rates of foreign underlying tax - Case V computations - dividends received on or after 31 March 2001

Example 1

The district has referred a dividend to the Underlying Tax Group (UTG) under INTM164440. The rate of corporation tax is 30%.

The UTG finds out this comes from company A that in turn received a dividend of 51 from company B in a third country. Their computations are:

Company BRelevant profits51
 Tax paid72
  123
 Mixer Cap (51 + 72) x 30%37
 EUFT (51 + 72) x 45% = 55 less 3718
Company ARelevant profits (including 51 dividend from Company B)100
 Further tax paid0


Underlying rate computationsDividend100
 Total tax paid72
 Actual rate42%
 Tax credit allowable37
 Capped rate (to be applied to dividend)27%

In accordance with INTM164460 the UTG therefore supplies the following:

Dividend100
Actual rate of underlying tax42%
Capped rate of underlying tax27%
Amount of Eligible Unrelieved Foreign Tax18


Case V computation:Dividend100.00
 plus underlying tax
100/58 x 42
72.00
  172.00
 Tax at 30%51.60
 Foreign tax credit
100/73% x 27%
36.99
 Net UK liability14.61

The EUFT can be used against pooled dividends (see INTM164270). It is underlying tax, so can only be used against the Single Related Qualifying Dividend.

Example 2

The district refers a second dividend to the UTG. When the dividend is paid, and for the whole accounting period, the rate of corporation tax is 30%. In accordance with INTM164460 the UTG supplies the following:

Dividend100
Actual rate of underlying tax42%
Amount of Eligible Unrelieved Foreign TaxTo be determined by the district


Case V computation:Dividend100.00
 plus underlying tax
100/58 x 42
72.41
  172.41
 Tax at 30%51.60
 Foreign tax credit limited to (100 + 72.41) x 30% because of the Mixer Cap ( INTM164220)51.60
 Net UK liabilityNIL

(If the rate of corporation tax charged for the AP remains unchanged the mixer cap restriction is the same as the general restriction of credit relief to the amount of UK liability under S797 ICTA 1988, so it will be unnecessary to do the former calculation).

Eligible Unrelieved Foreign Tax

Under S806B the amount of EUFT is the amount that would be allowed if the rate of corporation tax were as designated in S806J(7) (currently 45%), less the amount already allowed against the dividend. However if:

a) the dividend is unmixed, i.e. does not contain elements from a sub-group of companies;

b) the actual rate of underlying tax is 45% or less

Then the amount of EUFT can be calculated simply by subtracting the amount used against the dividend (51.60) from the actual amount of underlying tax paid (72.41). So EUFT of 20.81 is available to use against pooled dividends (see INTM164210). As this is underlying tax, it can only be used against the Single Related Qualifying Dividend ( INTM164270).

Example 3

The district refers a third dividend to the UTG. The rate of corporation tax is 30%. In accordance with INTM164460 the UTG supplies the following:

Dividend100
Actual rate of underlying tax50%
Amount of Eligible Unrelieved Foreign TaxTo be determined by the district


Case V computation:Dividend100.00
 plus underlying tax
100/50 x 50
100.00
  200.00
 Tax at 30%60.00
 Foreign tax credit
(100 + 100) x 30%
60.00
 Net UK liabilityNIL

Eligible Unrelieved foreign tax

Under S806B the amount of EUFT is the amount that would be allowed by the mixer cap under S799(1A) ICTA 1988 (see INTM164240) if the rate of corporation tax were as designated in S806J(7), (currently 45%), less the amount already allowed against the dividend.

The amount that would be allowed under S799(1A) would be:

(Dividend plus Underlying tax) x 30%: i.e. (100 + 100) x 45% = 90.00

The amount allowed against this dividend is 60.00, therefore EUFT available to use against pooled dividends is 30.00 (see INTM164270). As it relates solely to underlying tax it can be used only against the Single Related Qualifying Dividend.