LLM7190 - Double taxation relief: corporate members: pre-pooling rules: a practical approach

The allocation of US income over the three syndicate years will normally determine how the US tax paid in a calendar year is allocated to syndicate years of account. There is no methodology set out in legislation to do this, but the HMRC view is that two qualifications should apply where US tax is not first restricted to the UK CT rate. First a US loss in one or more syndicate years should not give rise to negative amounts of US tax in those years. Second, any re-allocation of expenses such as profit commission is to be made in terms of an adjustment to profits or losses and not in terms of amounts of negative US tax or giving rise to negative US tax amounts. Negative amounts of US tax are to be set at nil and the sum of all positive amounts should equal the total US tax charged for the relevant calendar year.

Subject to these qualifications, HMRC will accept any reasonable allocation of income (and the related tax) to years of account. The proportion which can be reallocated must be a proportion that reflects those expenses allowed in the UK result. The reallocation must be carried out on a consistent basis or not at all.

Example

In this example the tax rates are assumed to be 34% in the US and 30% in the UK. A corporate member makes a profit of £1000 before expenses on its US business in the 1999 year of account business carried on by a syndicate. In the US the managing agent has paid tax on these profits in the years 1999, 2000 and 2001, but in each case other years of account also contributed to the US tax charge. The total amounts of tax paid were:

Expenses of £200 are allowed in the UK against the 1999 year of account. In the US these are allowed in the 2002 calendar year. In the UK tax is therefore based on profits of £800 in 2002.

The member chooses to allocate the US tax to the 1999 year of account as follows:

The amount the member chooses to reallocate to the 2002 year of account is £200 @ 34% = £68. This is treated as US tax paid in 2002.

The £272 is available as credit relief against UK tax on the profits declared in 2002, subject to the usual limit based on UK tax, i.e. £800 @ 30% = £240.