Vocabulary check - apportionment of FTC

To make sure I understand, one.more.time!

I have one source of income, from the USA (a pension), that I believe is exempt from UK tax (per tax treaty) as it is a government pension. As there would be no foreign tax paid on it, I simply file my IRS taxes as usual every year on it. My US social security is taxable only in the UK, so while I would list it on my 1040, it would not listed as taxable income. I would list the SS on the UK Self Assessment as taxable and white-space the pension as non-taxable per the relevent section of the tax treaty. Assuming that is the case, all is well.

In the possible event that HMRC, at some future point, decides that the pension should have been taxable in the UK, I would then have to come up with the cash to pay that additional amount for those past years when it was treated as non-taxable? (Ick. I'm not rich.)

If that happened, I would need to file 1040X and form 1116 for any applicable year, list the pension as resourced-by-treaty, and to apply tax credits to get US tax refunds for that year to apply towards the UK tax I would need to check "accrued" on the foreign tax credit form 1116. (Since I would not have paid the tax to the HMRC, I could not get tax credits for those past years if I check "paid".)  Otherwise, I'd be double-taxed.

Since I would have only the one revenue stream (the pension) taxed in the US, "apportionment" would be 100% of the resourced-by-treaty amount of the pension's credit. As SS is not taxed in the US, the UK tax on it cannot be used to offset US taxes.

If I knew in advance that the HMRC was going to tax my pension, I would probably be best to select "paid" rather than "accrued" on the form 1116, as I'd be able to pay what was due  (or enough of it to wipe my IRS taxes for that year) prior to 31 December. Although turbotax or H&R Block will probably be the entity doing the math on it anyway, there would be no advantage to selecing "accrued" on form 1116 in that case.

In the unlikely event we had to go back to the US, I would have no foreign income other than possibly in that first year when I still would owe tax to HMRC. So the "accrued" v "paid" would be a moot point. If we ended up in, say, France, where my SS would not be taxed, and my pension would not be, staying with "accrued" if I'd previously been on it would not matter, as their tax year is aligned with the calendar, and US tax year and there would be no credits as there were no taxes.

So, given that, am I ~finally~ understanding foreign tax credits and "paid" v "accrued" correctly? And apportionment on 1116 Forms?

In the possible event that HMRC, at some future point, decides that the pension should have been taxable in the UK, I would then have to come up with the cash to pay that additional amount for those past years when it was treated as non-taxable? (Ick. I'm not rich.)

Use the MAP procedures to ask the Competent Authorities to (a) reach agreement as to who gets to tax the pension, and (b) divvy up the tax paid in previous years accordingly?

Not the point here, actually.    Just need to know about form 1116 and "paid" v "accrued". Thanks anyway.

No problem.  Actually, I thought after I posted that HMRC might not be able to change their minds and demand backdated tax, depending on the circumstances. 

In case it’s useful to you or to anyone else who’s reading, the details are at
https://www.gov.uk/hmrc-did-not-act

WOW. That certainly isn't like the IRS!

WOW. That certainly isn't like the IRS!

HMRC is like a pussycat compared to the IRS 

A year or 2 after we had graduated and started working back in 1977 we received a letter from HMRC/DWP explaining that they had overpaid us and that the error was theirs. They detailed how much we were overpaid and said that repayment was voluntary. It was not a lot of money but we had married while in university and had spent every penny we had on buying a house a few months after starting work so we chose not to pay it back, assuaging any guilt that we had by the expectation that our future engineering careers would ensure that we would be paying plenty of tax in the coming years.

HMRC is like a pussycat compared to the IRS 

I would say, the legal restraints on HMRC represent normality.

 

OK then, I can relax a bit. I ~still~ have heard nothing from HMRC on the paper self-assessment they received 27 April. Phoned a couple of weeks ago and was told I'd hear something by last Thursday.

Not a peep. So I'll assume I've done everything correctly.

[Edit:  Ok, I did everything right. Finally got someone on webchat at HMRC to check on things. Apparently they mailed me something quite some time ago that I never received. All is good.]