UK and International Tax news

FB 2014 New Limit On Double Tax Relief

Thursday 8th May 2014

As previously announced in the Autumn Statement [see our UK Tax News article of 11 December 2013], the FB 2014 now includes provisions to limit double tax relief in respect of loan relationship, derivative and intangible fixed asset non trading credits to the amount of UK tax on the net amount of the credit after deducting related debits.

HMRC considers that, as there have been avoidance schemes which have sought to exploit mismatches between amounts of UK and foreign tax, the purpose of the new rules is to identify the amount of profit within the wider non trading profit that directly relates to the non trading credit on the loan relationship or other transaction giving rise to a claim for relief for foreign tax, which is then limited to the amount of corporation tax on that amount.

HMRC go on to say that, in practice, there will often not be any debits within the scope of the new rules, and give the example where a company receives interest from a foreign source after deduction of withholding tax.  However, if the loan had been made in a foreign currency, and an exchange loss arises on the loan in an accounting period, this debit would now have to be taken into account when calculating the foreign tax relief credit. Similarly if a provision or impairment loss is recognised on a loan, this will now have to be taken into account when claiming foreign tax relief on any interest received which has suffered overseas tax.

The new rules do not contain any tax avoidance purpose test and could therefore apply to any situation where the conditions are met, i.e. where there are related non trading debits.

The new rules apply for accounting periods beginning on or after 5 December 2013.  For accounting periods which straddle this date, the new rule applies as if the accounting period is split into two separate accounting periods, one relating to the period before 5 December 2013 and one relating to the period on or after that date.

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