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Where Taxpayers and Advisers Meet

Tax credit on foreign dividends calculates wrongly with HMRC tool

FigNewton
Posts:46
Joined:Fri May 06, 2016 5:05 pm
Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby FigNewton » Mon Apr 10, 2017 12:04 pm

I am doing a preliminary calculation of my 2016-17 SA tax using the HMRC online tool. I encounter a problem I did not have when using the same tool for 2015-16.

I have £4,800 UK dividends and £6,000 foreign US dividends from which 15% tax has been withheld. I fill in the boxes correctly, stating that I paid £900 foreign tax credit on the US dividends. The HMRC tool gives, with "view your calculation"

Code: Select all

Source of income USA company dividends Country USA Amount of income 6,000.00 Foreign tax 900.00 Special Withholding Tax 0 Maximum foreign tax credit relief 15% Taxable amount 6,000.00
But then on the next page:

Code: Select all

Foreign tax credit relief against UK Income Tax: £ 0.00
This does not seem correct. Surely I should see an amount of UK £4,800 + US £200 dividends excluded by the £5,000 dividend allowance, and then obtain at least 15% x £5,800 as a foreign tax credit against the remaining tax of 32.5% x £5,800.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby bd6759 » Mon Apr 10, 2017 5:38 pm

Have you entered all of your income? If that is the only amount you have entered there will no tax libaility, and therefore no foreign tax credit.

Also note that the dividend allowance is not an allowance. It is a nil rate band. The first 5000 of dividends are taxable at a rate of 0%.

FigNewton
Posts:46
Joined:Fri May 06, 2016 5:05 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby FigNewton » Mon Apr 10, 2017 5:58 pm

Yes. I have salary, bank interest and property income, making me a higher rate taxpayer, paying 32.5% on my taxable dividends. These have all been entered in the other sections of the SA and the tax on those computes correctly. I phoned HMRC customer service and they were stumped. They promised to come back to me within two hours after referral to an expert, but that was six hours ago. I am guessing there is a software error in the HMRC online SA tool. I am not surprised - the interaction of foreign tax credits with appropriate dividends was always going to be tricky to figure when the Dividend Allowance (as HMRC refer to it) is simultaneously in play. I've noticed that none of the examples here addresses the way the Dividend Allowance interacts with foreign tax credits: https://www.gov.uk/government/publicati ... -factsheet

I tried to see if I could compute the foreign tax credit manually, to override the incorrect calculation of a £0 foreign tax credit. That led me to discover a different error. The HMRC SA tool provides box numbers for the Foreign Tax Credit Relief Working Sheet (FTCRWS) - but these differ by 10 from those that are in the actual form: https://www.gov.uk/government/uploads/s ... S_2017.pdf

E.g. Box TCI112 on the actual form is mistakenly called TCI102 within the SA tool. I have reported this to HMRC.

AlanJD
Posts:5
Joined:Wed Jun 04, 2014 12:19 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby AlanJD » Fri May 12, 2017 4:40 pm

I phoned HMRC customer service and they were stumped. They promised to come back to me within two hours after referral to an expert, but that was six hours ago. I am guessing there is a software error in the HMRC online SA tool.
Did you ever get a response? I had a similar error with the software when I tried to get some approx calculations.

FigNewton
Posts:46
Joined:Fri May 06, 2016 5:05 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby FigNewton » Mon May 15, 2017 10:11 am

I received the reply that if the HMRC web tool is calculating tax wrong then I should submit a paper return and let HMRC calculate the tax manually. I thought this was not very helpful, particularly for any taxpayer who might not be able to spot for himself when the HMRC tool is calculating wrongly!

I think I will simply tick the box where I can say that I wish to use my own figures for foreign tax credit, and replace their 0 by my belief it is 15% of any US dividends falling outside of the £5,000 dividend allowance, on which I've paid the 15% US withholding tax.

I am tempted to purchase software like TaxCalc just to see if that also gets the calculation wrong. I will also check back occasionally to see if the HMRC tool has been corrected. Surely I won't be the only one to draw this problem to their attention.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby robbob » Mon May 15, 2017 10:50 am

I am tempted to purchase software like TaxCalc just to see if that also gets the calculation wrong. I will also check back occasionally to see if the HMRC tool has been corrected. Surely I won't be the only one to draw this problem to their attention.
all approved for submission commercial software must match the hmrc calcs so if hmrc get it wrong then the software firm is obliged to match the hmrc errors (hence the need for paper returns in situations like this) - the best you can hope for is that the software provided may alert you to the fact that there is a mismatch in the calculations - i am guessing some may even offer the correct calcs if you are lucky.

I think there is a full list available of all known situations where a paper return must be submitted - i can't find the link - although there may be unknown errors still being uncovered.

Unfortunately i don't know the answer to your question and the answer may depend on the level of your other income streams - without seeing a black and white worked example i would be wary of presuming anything, asking the specific technical question in writing (clear fully worked example) of hmrc may be the best route to finding the answer as to whether there is a reason for the mismatch you appear to have.

Bruce_A
Posts:1
Joined:Tue Jul 04, 2017 5:55 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby Bruce_A » Tue Jul 04, 2017 6:54 pm

Has anyone figure out how to use in the paper FTCRWS form for 2017 (or better, produce a working spreadsheet)? There are LOTS of problems with it eg TC34 says £2700+A117 but I think A117 refers to the SA110_notes for 2016 and should really be A130. Then there instructions for TC47: "Smaller of (TC40 minus TC42) minus TC46". Should the second "minus" read "and"? I still haven't figured out what TC56 is supposed to be.

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby Lambs » Tue Jul 04, 2017 8:01 pm

Dear All,

Just for the sake of completeness, I am adding similar topics:

http://www.taxationweb.co.uk/forum/inco ... 51911.html

http://www.taxationweb.co.uk/forum/fore ... 51777.html

One thing our beloved former chancellor could not realistically claim is that his simplifications of the tax regime, actually simplified the tax regime. Or that his ability outmatched his ambition.

Kind regards,

Lambs

MarquisBill
Posts:1
Joined:Sun Jan 14, 2018 1:19 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby MarquisBill » Sun Jan 14, 2018 1:36 pm

the HMRC form no longer automatically calculates the Foreign Dividend Tax credit value and sets it to zero. It then asks you if you are happy with the value of zero and if not provides access to a calculation form so that you can calculate it yourself. TaxCalc does this for you automatically.

When I calculate the FTCR value and enter it into the HMRC form, it gives the same answer as TaxCalc.

###

The USA deducts 30% tax from dividends. 15% if you signed a W-8 BEN form (DTA) - I assume you did. The UK wants to take 7.5% Income Tax.

You are allowed to claim the lower of... what the USA took, or, what the UK would take. You lose the rest.

So in this case you can claim what the UK would take. As it happens 7.5% is half 15%...
So you can claim half what the USA took, as FTCR. Simple. Finished.

But.. that's if your income falls in the basic band. And if the dividends fall above £5,000 zero rate.

It is possible foreign dividends could fall in another band. Or across bands.
Or across the £5,000 zero rate band for dividends. Hence, HMRC says FTCR is £0 - almost certainly not true.
But, they say, you can work it out for yourself! Just like CGT, then. "we work it out for you", so long as you tell us what it is!

However, the basics are pretty simple. HMRC says your foreign dividends are your top slice of income.
That's a useful start.

It could be pretty clear if... all your dividend income is under £5,000 in total or... you have at least £5,000 in UK dividends too, and... you are not within £5,000 (up or down) of a tax band threshold. In that position your dividend rate should be obvious.

Typically you will be comparing... 0%, 7.5%, 32.5% or 38.1% for UK tax with 15% or 30% for the USA. You can claim the lower of the UK and US rates/amounts as FTCR. Many people will be able to work on just that basis.

Otherwise, you need to cut your income into slices. As HMRC says, use the highest-taxing foreign country first.

For the first foreign country, take... whatever amount of dividend income reduces you to £5,000 of dividend income, or... reduces you down a tax band (i.e. takes you to the threshold). Its whichever of those you hit first.

For that amount, this slice, decide... whether it is 0% rated for dividend income.

If not, decide the tax band it falls in - so you know which UK dividend tax rate applies.

Decide which is lower, the UK tax or the foreign tax? You can claim the lower as FTCR.

OK, that slice is dealt with. So, reduce your foreign dividends and gross income by that amount.

Now repeat for the next slice of foreign dividends. And so on.

You claim FTCR for each page/line of foreign dividends. HMRC will tell you its zero and ask if you agree. Say no, and you will get a very complicated page. Usually you can ignore that and just click next. You will see a box where you can just key in the amount. Done! Tax saved.

There might be other issues, such as whether there is DTA, and whether that DTA has special provisions. But most people need not bother with that.

preece
Posts:1
Joined:Thu Jan 25, 2018 5:31 pm

Re: Tax credit on foreign dividends calculates wrongly with HMRC tool

Postby preece » Thu Jan 25, 2018 5:34 pm

MarquisBill
Thanks, your post was really helpful ( especially with dividends spanning tax bands ) - and the rules make perfect logical sense.


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