I have a client with a large portfolio based in Jersey. The shares are held in a nominee account and the tax deducted at source exceeds that which would have been deducted under the various tax treaties. The broker tells me this is normal. I have traditionally claimed tax credit based on the tax actually paid, my rationale based on my understanding that the (International and Other Provisions) Act 2010 only restricts the credit to the amount paid given all reasonable steps have been taken under the double tax arrangements. HMRC do not agree and think it is limited to the amount that should have been paid under the double tax treaty. Am I just wrong?
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You are wrong, you can only obtain a tax credit up to the treaty rate, any tax withheld over this rate will have to be reclaimed by your custodian. You should complete the relevant forms for the reduced treaty rate to apply going forward.
You would need to find out if the custodian offers a tax reclaim service, how much it costs and then determine whether it is worth it.
There is loads of paperwork and form filling, delays in receiving the tax reclaim and the rules will be different for each country.
I would ask the broker why the client is suffering the higher rate - they should have been sent all the treaty forms for completion at the outset.
Further to the other discussion, you could look into claiming a deduction for the excess but I don't know how this would be done in the tax return. I would not claim a credit and don't know how your software let you do this before.
As you rightly say, the statutory requirement is:-
"33(1)The credit under section 18(2) must not exceed the credit which would be allowed had all reasonable steps been taken—
(a)under the law of the non-UK territory, and
(b)under double taxation arrangements made in relation to that territory,to minimise the amount of tax payable in that territory.
(2)The steps mentioned in subsection (1) include—
(a)claiming, or otherwise securing the benefit of, reliefs, deductions, reductions or allowances, and
(b)making elections for tax purposes.
(3)For the purposes of subsection (1), any question as to the steps which it would have been reasonable for a person to take is to be determined on the basis of what the person might reasonably be expected to have done in the absence of relief under this Part."
If you can show that your client has taken all reasonable steps, then seek to take the matter to the Tax Tribunal.
HMRC may well in that event wish to avoid having this question discussed in this forum,and cede.
They would have no grounds under this section if they didn't complete the treaty forms. What reasonable steps do you feel have been taken?