Introduction Background Note
5.In general, UK companies are taxed on all of their income or chargeable gains no matter where they arise, but where the income has a foreign source Part 18 of ICTA provides relief for double taxation that may arise as a result of tax due in both jurisdictions.
6.Where a dividend is received from a foreign company, relief is available for foreign taxes paid directly on that dividend and, in certain circumstances, for tax paid on the profits out of which the dividend is paid. The latter is referred to as “underlying tax”. Apart from dividends from St Kitts and Burma, the latter relief is available only to companies and the amount is subject to a limit imposed by the “mixer cap”.
7.The purpose of the mixer cap is to limit the relief for underlying tax suffered by reference to the amount of CT due on the foreign dividend. The mixer cap has always worked in this way, but the lowering of the CT rate for the financial year 2008 created an anomaly. It became clear that the mixer cap could operate in such a way as to limit double taxation relief beyond the amounts intended by the original mixer cap legislation.
8.The proposed changes apply only to companies and ensure that the mixer cap will continue to apply as intended, and as it would have done had the CT rate not been changed. The amount of relief available to companies will not now be limited by the unintended consequences of the interaction between the operation of the mixer cap and the change in the rate of CT.
9.To ensure that the mixer cap never applies at a rate lower than the effective rate applying to a dividend, the changes generally have retrospective effect from 1 April 2008. To limit potential disadvantages, the change made by subsection (4) has effect from 22 April 2009.