How to calculate Foreign Tax Credit Relief

Introduction

When Can Foreign Tax Credit Relief (FTCR) on Income Be Claimed?

FTCR can be claimed if a client has paid foreign tax on income which is also chargeable to UK tax. The amount which can be claimed is limited to the lower of the foreign tax paid by the client or the equivalent UK tax on the income. 

How_is_this_input_into_IRIS?

How_is_FTCR_calculated?

Can_the_FTCR_amount_be_overridden?

How is this Input into IRIS?

Within each data entry section which can be used to record foreign income, there is a tick box to Claim Tax Credit Relief. If this option is ticked IRIS will automatically calculate FTCR, if the option is not ticked then relief will be given for any foreign tax paid by deducting it from the income, the net amount of income that is actually taxable will then be shown on the tax computation. FTCR can be claimed on income entered into any of the following sections:

• Employment

• Trade, Profession or Vocation. Note that when claiming FTCR within this section the income must be included in the account period and within the foreign section

• Foreign- all sections except disposal of holding in offshore funds and gains on foreign life assurance policies

• If the client’s only source of foreign income is dividends of less than £300 it will be necessary to force IRIS to produce the foreign supplementary pages in order to allow the program to calculate the FTCR.

• Trusts Settlements and Estates- the estate section only

• Minster of Religion- other income and compensation sections only

• Lloyds- foreign and foreign tax sections only

FTCR can also be claimed on capital gains and this is dealt with separately within the capital assets module.

Back to top

How is FTCR Calculated?

Example

The client has the following income for the 2017 tax year:

(interest)

IRIS will calculate FTCR of £40 in for this client and this has been calculated as follows:

Begin by calculating the equivalent UK tax on the client's foreign interest income, this is done by carrying out two calculations, one to calculate the total tax due including the foreign interest income and the second calculation without the foreign interest income.

The calculations are as follows:

Calculation One- Including the Foreign Interest Income:

Income

Tax Borne

Calculation Two- Excluding the Foreign Dividend Income

Income

Tax Borne     

The difference between the two income tax due amounts is the equivalent UK tax on the foreign interest income:

£8250.00 - £8010.00= £240

The client paid £40 of foreign tax on this income so the FTCR is limited to £40 as this lower than the equivalent UK Tax of £240.

What if the Client has More than Once Source of Foreign Income?

IRIS will continue to calculate the FTCR automatically. The equivalent UK tax can still be checked using the method outlined above, by first including the all the income and noting the income tax due amount then carrying out a calculation deducting each source of foreign income one by one, starting with source which has the highest percentage of foreign tax deducted. 

Is there a Report to Show the FTCR Calculation?

A basic report to show the FTCR calculation can be found by clicking the Reports menu and selecting Foreign Tax Credit Relief. This report will show each source of foreign income, the foreign tax paid, the equivalent UK tax and the final amount of FTCR for each source of income. Note that this report does not show how the equivalent UK tax has been calculated.

Back to top

Can the FTCR Amount be Overridden?

If a specific agreed amount of FTCR must be claimed or there is a double taxation agreement in place and the FTCR amount needs to be altered to reflect this, the FTCR can be override to show the required amount as follows:

1. Log onto IRIS Personal Tax and select the client.

2. Click Foreign and select Additional Information.

3. Enable the option to Override the foreign tax credit relief value.

4. Enter the total amount of FTCR which can be claimed in the year then click OK.

Back to top