Adding back excess of foreign withholding tax

Didn't find your answer?

I'm struggling to work out if excess foreign withholding tax (that cannot be recovered in the source country) is available as an expense deduction in the CT computation or not.

For round numbers say there is £10k of USA income received by UK Ltd Company:

£10k @ 30% USA WHT = £3k

£10k @ 19% UK CT = £1.9k

 

From reading the UK - USA double taxation treaty (and lots of other "guidance" pages!) my understanding there are two options:

1. Reduce UK tax by foreign tax, capped at what the UK would have been.

2. Disclaim option 1 and include the foreign tax paid as an expense in the P&L

 

Option 1 is preferable as there is enough profit (option 2 being better suited to companies with losses). Option 1 would be:

£3k CR trade debtors on balance sheet

£1.9k DR corporation tax liability on balance sheet

£1.1k DR profit and loss account

 

The £1.1k in the P&L I'm struggling with whether to add it back or not. Everything I've read says it's either option 1 or option 2, but not both, so my thinking is the £1.1k is not an allowable expense (as that would be sort-of both!). However, I can't actually find anything that specifically mentions this "excess". I would be very grateful if someone would confirm my thinking that the £1.1k is not allowable CT deduction, or point me in the right direction.

 

Thank you for any help, it is appreciated. 

Replies (10)

Please login or register to join the discussion.

avatar
By Bobbo
20th Jun 2024 15:29

Is it not just:

Cr Trade Debtors 3k
Dr Tax expense 3k

Then when you do your CT comp you will make some sort of computation adjustment to reduce the figure by 1.9k, so the debit to Tax expense will be 1.9k lower than it otherwise would have been. Overall result being tax expense is 1.1k higher than a straight 19% being the 11% tax rate differential on 10k.

(I've never had to deal with this, but this seems to me how option 1 should work)

Thanks (1)
avatar
By Tax Dragon
20th Jun 2024 15:41

TIOPA s31f?

Thanks (2)
Replying to Tax Dragon:
Intercity
By Mr Hankey
20th Jun 2024 16:23

Thanks, TIOPA section 31 is useful, especially (2) (a)

(I'm not sure what the "f" in your reference relates to, section 31 has subsections 1 to 6, I can't see any "f")

Thanks (0)
avatar
By Matrix
20th Jun 2024 17:47

1. Wouldn’t the max be the treaty rate which may be less than the UK rate?

Thanks (0)
avatar
By kim.shaw-and-co.com
20th Jun 2024 21:47

UK-resident companies often qualify for gross payments from the US if they submit an appropriate W8 to the payer. My first question would be why there is US witholding tax deducted from the relevant income in the first place ?

What is the nature of the income ?
Is it trading income or another form of income ?
Does the company not qualify for gross payments ?
Does it fall foul of the limitation on benefits provisions in the UK-US Treaty ?
Is the US activity significant relative to the entire trade of the company ?
Does the UK company have a PE there and file a US tax return ?

You can't really get to the question of whether relief is available for the difference between the UK and US tax (and hence whether any net deficit is above or below the PBT line) without first understanding why there is double taxation in the first place.

A witholding tax applied to sales invoices is effectively a tax on gross turnover and will not be a tax on the "same profits" UK corporation tax applies to. You therefore can't necessarily simply offset one against the other assuming that provided you have at least £10k of UK profit it can all be attributed to the US sale that in your example was subject to witholding tax.

If it would in principle have been possible to reduce foreign witholding tax to nil by completion of all the relevant associated paperwork and red tape then your only options are :

(a) Claim it back from the foreign authority; or

(b) Follow Option 2 - in which case the debit (for the full 30%) is 'above the PBT line' and is tax-deductible in the UK [usually by concession because strictly it is not necessarily incurred in connection with the company's trade even if it is wholly and exclusively so incurred]

You cannot in those circumstances take advantage of Option 1.

Unless there are exceptional or unusual circumstances I would not typically expect to see irrecoverable US witholding tax against a UK resident company on trading income.

Thanks (0)
Intercity
By Mr Hankey
20th Jun 2024 22:34

Thank you for the input.

I've been thinking this over and think I'm going to disengage. The more I research the matter, the more confused and out of my depth I'm feeling. This is one of the hardest parts I've found about working on my own- in a firm there were always seniors/ specialists/ partners to ask questions of and learn from, but on my own tricky matters sometimes can feel impossible to get my head round.

It's a shame, she's been a client for 4 years now and it used to be so straightforward. I hope she understands. It's a March year end so still plenty of time before anything needs filing.

A reduction in fee income, but I don't want the worry of getting it wrong or PI claims on my mind.

Thanks (1)
Replying to Mr Hankey:
avatar
By kim.shaw-and-co.com
20th Jun 2024 22:51

Mr Hankey wrote:

Thank you for the input.

I've been thinking this over and think I'm going to disengage.

You can always tap in to more experienced advice on a B2B basis in order to handle this issue. Croner-i Tax Team for example (along with some of the medium-sized firms and boutique tax firms) do offer hourly consulting to other professionals which the client can be offered on a disbursement basis if you level with her about the complexity aspects.

If you set up the network for it, the resource is there for times like this when you need it.

Just a thought ...

Thanks (1)
avatar
By taxdigital
21st Jun 2024 08:57

I'm not entirely sure where's the confusion. Without going in to all the chapter and verse, deduction relief isn't available for tax purposes if you're claiming credit relief. Which means the whole of £10k is treated as your income. Assuming you can't claim the foreign tax of £3k paid in the US back, you will release the dead balance of £1.10 sitting in debtors to P&L for accounting purposes. For tax purposes the debit of £1.10k fails the w+e test and, therefore, isn't available as a deduction and should, therefore, be added back. The credit of £1.90k tax means there is a net cash loss of £1.10k.

Thanks (1)
Replying to taxdigital:
avatar
By Matrix
21st Jun 2024 09:13

£3k loss surely? There is no tax credit if Kim’s assumption about the source is correct.

OP’s client can readily search for tax reclaim firms who can help with a refund and they should make sure they file the W-8BEN to enable future gross receipts.

Thanks (1)
avatar
By taxdigital
21st Jun 2024 09:44

Matrix wrote:

£3k loss surely? There is no tax credit if Kim’s assumption about the source is correct.

I haven't looked at the technical side of it at all (neither I read kim.shaw-and-co.com's comments which are always worth a read): I was just saying it shouldn't be so difficult that OP should decide to disengage. As the economic centre of gravity shifts to Asian countries, it's quite common even for micro businesses to have tax affairs in other countries. So, double taxation relief is likely to be discussed more often on here.

Edit: Having now read kim.shaw-and-co.com's comment, yes of course the credit relief is subject to s.33 TIOPA.

Thanks (1)