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UK: Settling double taxation claims, franked investment income and portfolio dividends

UK: Settling double taxation claims, FII

HM Revenue & Customs (HMRC) released guidance offering an opportunity for taxpayers to settle statutory franked investment income (FII) and portfolio dividend claims.


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The guidance is intended to allow companies in respect of statutory claims made for relief against taxable foreign dividend income following the FII and controlled foreign corporation (CFC) and dividend “Group Litigation Orders” (GLOs). This guidance follows the decision of the UK Supreme Court in Prudential Assurance Company Limited v HMRC [2018] UKSC 29 (the test case for the CFC and dividend GLO) and the Supreme Court’s decision on which issues it would hear in connection with the FII GLO.

In summary, for affected dividends, HMRC will close open enquiries into corporation tax returns that include a valid double-tax relief claim for the foreign tax borne on the underlying profits out of which a dividend was paid by adjusting the amount of the claim to the applicable foreign nominal rate with a similar approach for claims outside of returns.

HMRC confirmed that the mechanism that will be used to close enquiries into affected returns will be to amend the returns to give effect to the conclusions stated in the closure notices (which would include increasing the amount of credit claimed). HMRC will adopt a similar approach, albeit using different statutory mechanisms, for open enquiries into valid claims for underlying tax made outside of a return within the time limits in section 806(1) of the Income and Corporation Taxes Act 1988 (ICTA) and periods prior to corporation tax self-assessment when there is an open appeal.

HMRC now is also accepting that guidance on the extended time limits for making a claim for credit in section 806(2) ICTA 1988—that a credit could only be rendered insufficient if a claim had already been made for relief for foreign tax by credit—was too restrictive. For corporation tax self-assessment accounting periods when foreign dividends paid out of profits and subject to creditable tax were not returned as taxable (pending the outcome of the GLOs), HMRC may accept that a claim can be made within the relevant time limit after the enquiry is closed and the dividends brought into charge for UK tax purposes. The same applies to assessments for pre-corporation tax self-assessment periods.

HMRC will not accept that it is possible to treat a claim for withholding tax as a claim for credit in respect of the underlying tax computed at the foreign nominal rate. HMRC has also outlined circumstances when it may be considered to be premature to settle claims. It is also noted that claims are fact-sensitive and may not fall squarely within the examples given.

HMRC indicated that all necessary information to close enquiries on this basis is not available, HMRC will seek that information before closing. Importantly, the guidance does not detail the evidence that HMRC may require.

KPMG observation

In view of the large number of claims involved, companies may want to take this opportunity to review their claims in order to approach HMRC proactively with the information required to settle the claims, including when the claims do not, at first glance, fall squarely within the terms of the guidance or terms on which the guidance is silent.

Consideration of the validity of claims in line with the guidance and a quantification exercise will likely be required. This is particularly so in order that these EU law based claims can ideally be resolved within the Brexit transition, due to end on 31 December 2020, set out by the EU (Withdrawal) Act 2018 (as amended).

Read a February 2020 report prepared by the KPMG member firm in the UK

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