ANNEX 1:: MINOR CHANGES IN THE LAW Change 4: Double taxation relief: income tax and capital gains tax: order in which credit relief is allowed: sections 36 and 40
This change puts on a clear statutory footing the practice that, where relief by way of credit is allowed against income tax in respect of income from more than one source or against capital gains tax in respect of more than one capital gain, the sources of income or capital gains are to be taken in the order which provides the greatest reduction in the liability to income tax or capital gains tax for the tax year.
Section 796 of ICTA ensures that a foreign tax credit is only deducted from income tax on the income to which the foreign tax credit relates, and cannot be used to shelter any other income from income tax.
Section 796(2) deals with the case where the taxpayer is to be allowed credit for foreign tax in respect of income from more than one source. It requires such income to be dealt with separately, source by source.
Section 796(2) requires income from each source to be dealt with successively. But it does not specify the order in which such items of income are to be taken. HMRC’s practice, as published in the International Manual paragraph 165040, is to take such items of income in the order most favourable to the taxpayer’s claim for DTR.
Section 36 puts this practice on a clear statutory footing.
Section 277(1) of TCGA extends section 796 of ICTA to capital gains tax. HMRC’s practice in applying section 796 of ICTA to capital gains tax, as published in the International Manual paragraphs 169120 and 169130, is to deal with capital gains in the order which provides the greatest reduction in the taxpayer’s capital gains tax liability for the year.
Section 40 puts this practice on a clear statutory footing.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.