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ACCA Strategic Professional · Advanced Taxation (UK) · Corporation tax: the comprehensive calculation of the corporation tax liability, including overseas aspects

Mercia Ltd is UK resident, and its taxable total profits already exceed £250,000, so the main rate of 25% applies. It receives overseas royalties of £45,000 after the deduction of 10% foreign withholding tax. Assuming a double tax treaty gives credit for the foreign tax, what additional UK corporation tax is payable on the royalties?

The additional UK tax is £7,500. The royalties are taxed gross at £50,000, giving UK tax of £12,500 at 25%. Double tax relief equals the lower of the £5,000 foreign withholding tax and the UK tax, so £5,000 is credited against the £12,500.

  1. A£7,500Correct
  2. B£12,500
  3. C£5,000
  4. D£8,000

Explanation

A UK resident company is taxed on worldwide income, so the gross royalty of £50,000 (45,000/0.9) is included in profits. UK tax = 50,000 × 25% = 12,500. Foreign tax = 5,000, and double tax relief is the lower of the foreign and UK tax, so £5,000. Additional UK tax = 7,500. £8,000 arises from wrongly grossing up the foreign tax as 10% of £45,000 (£4,500) and £12,500 ignores relief.

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