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Posted Sat, 16 Jul 2022 15:55:35 GMT by Slavomir Paleolog
Hello, I am having an issue in computing foreign tax credit relief. Until very recently I thought I understood what I needed to, but this does not appear to be the case after I received a letter from HMRC questioning the amount of tax I had paid on foreign earnings in my previous tax returns. My issue relates to savings interest income which I got in Poland. The Polish authorities tax the interest at source at 19%. I was under the mistaken impression I could use this 19% against the 20% UK liability and just pay 1% extra to HMRC. I thought I was entitled to full relief. Indeed I took advice on this issue a number of years ago in the UK. It seems the advice was wron g although I always did declare the total amount of Polish income received. I have dug deeper and done some research and come across the "Digest of Double Taxation Treaties" on the HMRC web pages where I think I may have the answer. As you know this is a large table citing the main provisions of the Double Tax agreements the UK has with many contries around the world. For the row concerning Poland, the so-called "treaty-rate" is listed at 5% for bank savings interest. In the preamble before the table appears I also read "Where a percentage rate is shown it is the ‘treaty rate’. The relief from UK tax is the excess of the UK income tax over the treaty rate. The basic rate of UK income tax is 20%. So if (for example) the treaty rate is 15% then the excess of 5% tax is relievable if a satisfactory claim is made." This seems to suggest that I should have been paying 5% tax to HMRC (and NOT the 1% as cited above). Is that right ? But if I now read the full text of Double Taxation Agreement between the UK and Poland it seems to say that the Polish authorities can only take a maximum of 5%. This seems to further imply that HMRC would be expecting to receive 15% of the foreign income every year. Is this right or not ? So is it 5% or 15% ? Is there anything esle I should be aware of ? I am rather confused to say the least! I am very keen to comply and pay any tax due but I need to know how much extra before I submit my disclosure via the 'Worldwide Disclosure Facility'. Any help very gratefully received. Thank you very much. 
Posted Tue, 19 Jul 2022 13:13:54 GMT by HMRC Admin 17

Hi,
 
Under the Double Taxation Agreement, you are only entitled to claim 5% on the Polish interest that you received.

If you are a basic rate taxpayer, you are still allowed to receive £1000 of interest, including foreign interest, that is tax free.

If your total interest is above this, then you would claim 5% of your foreign interest as the amount of tax credit that is due.

HMRC would than charge a further 15% on the interest you receive  .

Thank you
Posted Tue, 19 Jul 2022 15:00:05 GMT by Slavomir Paleolog
Dear HMRC Admin 17, Thanks a lot for your prompt, helpful and clear reply. I was thinking 15% is the correct HMRC tax liability too and you have kindly confirmed this. Again, thank you. With kind regards, Slavomir Paleolog

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