Finance Bill Tracking Service 2010 | Budget 2010


Who is likely to be affected?

1. Banks and financial institutions using avoidance schemes to receive double tax relief (DTR) where they have not suffered the cost of the foreign tax.

General description of the measure

2. Legislation will be introduced in Finance Bill 2010 to confirm a person may only deduct foreign tax from any foreign income where that person has included the foreign tax in his taxable income. Legislation will also be introduced to reaffirm the scope of the targeted DTR anti-avoidance rule.

3. Regulations will be made and laid to amend the manufactured overseas dividend (MOD) regulations. In particular, changes will be made to the offset rules to stop financial traders effectively obtaining relief for foreign tax twice. There will be consequential amendments to certain other provisions in the regulations that could be exploited in similar ways.

Operative date

4. The amendments to primary legislation will have effect for foreign tax paid or payable on or after 1 April 2010, as regards corporation tax, and 6 April 2010, as regards income tax and capital gains tax.

5. The amendments to secondary legislation have been laid today and have effect in relation to MODs paid or treated as paid 21 days after 24 March 2010.

Current law and proposed revisions

6. These amendments deal with three aspects of the DTR and MOD rules.

Deduction for foreign tax

7. Under current law, where foreign tax is paid and no credit is claimed then DTR may be given as a deduction to reduce the foreign income assessable to UK tax. The provision is aimed at situations where a person is taxed on more income than he receives. For example, if a company is required to bring gross income of 100 into its tax computation following a net receipt of 85, the provision will reduce the taxable income by the amount of foreign tax borne, i.e. 15.

8. HM Revenue & Customs has identified a scheme where a person effectively claims double relief for foreign tax. The company only brings the net income into its computation in the first place but then also seeks to use the provision to deduct the foreign tax again.

9. The amendment will ensure that a person may only deduct foreign tax where that person has included the foreign tax in his taxable income.

Targeted DTR anti-avoidance rule

10. One of the conditions for the targeted anti-avoidance rule to apply is that there is a prescribed scheme. One of the prescribed schemes deals with arrangements where a person claims a credit for foreign tax that is negated elsewhere. The amendment will remove an unnecessary hurdle that the foreign tax is paid or payable by the person claiming credit.

11. Another prescribed scheme deals with circumstances where a person who is a party to an arrangement takes a step, or omits a step, and the effect is to increase a DTR claim. The amendment ensures that the provision can apply whether the steps are taken before or after the scheme is implemented.

MOD rules

12. Where a company has suffered foreign tax on a foreign dividend, it can claim relief by way of a credit or deduction. Alternatively, certain financial traders can use the MOD rules to offset the foreign tax against a liability to pay tax due on a MOD it pays. The intention of the DTR and MOD rules is to ensure that only one of the three routes to relief is available. The amendments to the MOD regulations are designed to combat schemes which effectively try to claim two reliefs, once under the offset rules and another by not including in taxable income the gross amount of income received.

13. Certain provisions have also been identified in the regulations which prescribe that DTR will be available in certain circumstances. These will be amended to clarify that the relief is available only if the gross amount of the dividend or MOD is included in taxable income.

Further advice

14. If you have any questions about the changes, contact Giles Horridge on 020 7147 2654 (email: or Richard Rogers on 020 7147 2625 (email: Information about Budget measures is available on the HM Revenue & Customs website at