INTM167480 - UK residents with foreign income or gains: corporation tax: Intangible fixed assets: examples
Example 1
Assume that for its accounting period ending 31 December 2010 a company has foreign royalties from its intangible assets, which count as non-trading items, of 拢1000 which have borne foreign tax of 拢100, domestic profits (say Property Income) of 拢2000 and non-trading outgoings of 拢2500. The company makes a claim under CTA09/S753 () to set off its non-trading loss of 拢1500 (拢1000 - 拢2500) against its total profits for the accounting period. The corporation tax due before double taxation relief is therefore 28% x 拢500 (拢2000 - 拢1500) = 拢140.
Solely for the purpose of calculating the UK tax attributable to the non-trading royalties, section 51 permits the company not to have to set off the non-trading outgoings against the non-trading royalties. Instead it can allocate them as it sees fit.
So, in the example above, it could allocate 拢2000 of the 拢2500 against the property income profit. But it would still have to allocate the remaining 拢500 to the foreign royalties of 拢1000. The result would be that all the corporation tax payable for the accounting period (拢150) would be attributable to the non-trading royalties of 拢500, that is the gross royalties of 拢1000, reduced by the 拢500 mentioned above. Since in this case the corporation tax which must be allocated to the royalties of 拢500 (拢500 @ 28%) exceeds the foreign tax on those royalties (拢100), the company would be able to reduce its corporation tax bill by the whole of the 拢100.
Without the provisions in TOPIA10/S51 the corporation tax referable to the royalties would be nil (because they are completely extinguished by part of the non-trading outgoings) and therefore none of the foreign tax on that credit could be set against the corporation tax payable.
Example 2
Assume that for its accounting period ending 31 December 2012 a company has foreign royalties from its intangible assets, which count as non-trading items, of 拢1000 and that they have borne foreign tax of 拢100, domestic profits (say Property Income) of 拢2000 and non-trading outgoings of 拢3000.
The company does not make a claim under CTA09/S753 () and cannot therefore set off its non-trading loss of 拢2000 (拢1000 - 拢3000) against its total profits for the accounting period. Instead it carries forward the 拢2000 to the next accounting period. It may choose to do so for example because it is liable only to the small profits rate for the current period but expects to be liable at the full rate in future. The corporation tax due before double taxation relief is therefore 20% x 拢2000 (the Property Income) = 拢400.
In these circumstances the company need not allocate the non-trading outgoings carried forward (拢2000) for the purpose of calculating the corporation tax referable to the foreign royalties. For that purpose it merely has to allocate the outgoings not carried forward (拢1000). It does so against the Property Income (拢3000) reducing it to 拢1000 and so, for the purpose of credit relief, it is able to regard the taxable profit of 拢2000 to be composed of 拢1000 of property income and 拢1000 of royalties.
Since the corporation tax which must be allocated to the royalties is 拢200 (拢1000 @ 20%) the whole of the foreign tax (拢100) can be relieved by way of credit.
Without this facility for reducing the non-trading outgoings by the non-trading loss carried forward the company would have had to allocate the whole of the 拢3000 of non-trading outgoings against its profits for the period. Only 拢2000 could have been set against the Property Income and it would have been compelled to set the balance against its royalties. No corporation tax would therefore have been referable to the royalties and no credit relief for the foreign tax would have been due.