Our client is a self-employed professional sportsman and recently one a prize whilst in the USA. Tax was witheld described on a remittance advice as "United Kingdom Foreign Tax Withheld 30%". This was in addition to California withholding tax of 7%.
The prize was about £1,000 so the tax deducted was about £370. The profit on the trip was only about £400 compared with total self employed profit of about £30,000, so is the foreign tax credit relief really just £88?
How does class 4 NIC come into the equation?
John R
Replies (6)
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Thanks Liz. Do you agree with my analysis of the UK self assessment position?
The sa guidance suggests that it is necessary to establish the element of total business profits that relates to the individual overseas activities. In this case we have calculated a profit of just £400 relating to the £1,000 prize. So the tax credit of £370 has to be restricted to the amount of UK tax arising on the £400 i.e. a mere £88!
US tax on prize.
He is allowed a tax credit in the UK of £300 and £70 for a total of £370.
The net profits after expenses are apparently £400.
Thus, if he filed a US tax return and reported his £1,000 income and his expenses, his US tax might be reduced, perhaps down to zero. The US allows him to deduct flights, meals, and any direct expenses for the prize (perhaps a new bat used only for that game?). Plus, there are personal allowances. I am sure the total US tax would work out to zero. The CA tax would be only slightly less than the withheld amount, however, leaving you with a tax credit in the UK of slightly less than £70 and no US tax.
The cost of hiring a US tax accountant to prepare this work is likely to be well in excess of the £300 withheld. Thus, it may be cheaper to pay double tax on the income than it is to hire creative and clever accountants to get out of it.
Foreign Tax Credit Relief
Very interesting question all this topic which I've tried to follow as someone has asked me about this. Can you just tell a dumb dumb (me) where the £88 foreign tax credit comes from, and perhaps how this has all ended up if you have ever reached that stage.
ps do countries such as the USA legislate that prizes are taxed over there at source for UK resident winners?
Regards
Alternatives
There's three roads to go down:
A) As mentioned above, you work out very specifically what the profit attributable to the prize is - in this case £400 and then you are entitled to tax relief at your highest marginal rate suffered. So a 40% taxpayer might be able to claim back £160, but here it would be at basic rate.
B) The Revenue will also allow you to take a fairly broad brush approach to working out the proportion of profit which is attributable to the prize. If the prize was £1,000, the turnover was £50,000 and the net profit was £30K, you can also say that because 1/50 of the turnover was in the US, 1/50 of the profit is the relevant share, or £600 and you can then claim that - at the highest rate of tax suffered = £120.
C) You treat the federal and state tax of £370 as an expense in its own right and as a result you only owe tax on £1,000 - £600 expenses - £370 taxes deducted = £30