Foreign income or not?



  • [Deleted User]
    [Deleted User] Posts: 0 Forumite
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    edited 22 January at 3:51PM
    If one thinks about it logically the inclusion of the foreign tax as an expense would mean that the taxpayer only obtains tax relief on the foreign tax, not a full credit for the tax actually paid. 
    That's right.  It can be advantageous if, for example, there is a loss in the year or the profits are covered by capital allowances, so that doing this would increase a loss that could be carried forward.  This is allowed by s112 TIOPA. 

    Going back to the OP,  I'm assuming that this is really a 5% withholding on turnover rather than, for example, you being treated as an employee for Australian purposes and having 5% withheld under the equivalent of the UK's PAYE rules.  I'll also assume that you've really incurred this (i.e. its been deducted and you haven't got a refund, and you can't claim it back from the ATO).  If my assumption are wrong, ignore the rest of what I say below. 

    Unfortunately, s112 does not allow a deduction as an expense when the foreign tax has been deducted from what is turnover rather than income.  So on the face of it, that is no use here.  But it can be deducted from trading profits of a business to put you in the same position as if you could use s112 (see BIM45901 for example).  So Curiousguy is right.

    A turnover-based withholding tax is not relievable against actual UK tax as opposed to profits. That sounds contradictory, so an example is best. Keeping numbers simple, if you are a 20% taxpayer and your profits are £10,000 (including an invoice of £1,000 to the Australian company but ignoring the £50 tax they withheld) then the right answer is UK profits £9,950 x 20% tax = £1,990 and no foreign pages would be needed.  It would be wrong to say £10,000 of UK profits x 20% = £2,000 less £50 Australian tax = £1,950 (but see my caveats above about what the 5% really is).

    I read the BIM again and the International Manual last night, slept on it and have just looked at TIOPA 2010 this morning.

    My current thinking is the OP has a choice between:-

    claiming FTR for the 5% Australian tax but this would not allow a deduction for it in computing the self employment profit and the foreign income section of the SA return would need to be completed


    making a deduction for the 5% Australian tax in computing the self employment income and not completing the foreign income section of the SA return


    which method is chosen would depend on what gives the least UK tax liability  

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