After section 798 of the Taxes Act 1988 there shall be inserted the following section—
(1)In a case where section 798 applies—
(a)subsection (2) below applies if the foreign tax referred to in subsection (1)(b) of that section is or includes an amount of spared tax; and
(b)subsection (3) below applies if the foreign tax so referred to is or includes an amount of tax which is not spared tax.
(2)For the purposes of income tax or corporation tax, the amount which apart from this subsection would be the amount of the foreign interest or foreign dividends shall be treated as increased by so much of the spared tax as does not exceed—
(a)the amount of the spared tax for which, in accordance with any arrangements applicable to the case in question, credit falls to be given as mentioned in section 798(1)(b); or
(b)if it is less, 15 per cent. of the interest or dividends, computed without regard to any increase under this subsection.
(3)If the amount of tax which is not spared tax exceeds—
(a)the amount of the credit which, by virtue of this Chapter (but disregarding subsection (2) of section 798), is allowed for that tax against income tax or corporation tax; or
(b)if it is less in the case of tax on foreign interest, 15 per cent. of the interest, computed without regard to any increase or reduction under this section or that subsection,
then, for the purposes of income tax or corporation tax, the amount which, apart from this subsection, would be the amount of the foreign interest or foreign dividends shall be treated as reduced by a sum equal to the excess.
(4)Subsection (2) above has effect for the purposes of corporation tax notwithstanding anything in section 80(5) of the M1Finance Act 1996 (matters to be brought into account in the case of loan relationships only under Chapter II of Part IV of that Act).
(5)Nothing in subsection (2) above prejudices the operation of section 795 in relation to foreign tax which is not spared tax.
(6)In this section “spared tax” means foreign tax which although not payable falls to be taken into account for the purposes of credit by virtue of section 788(5).”