Missed US Tax Returns: Splitting an HMRC Settlement by Year

Preparing Missed US Tax Returns after an HMRC settlement means claiming credit only for the tax element; interest and penalties never qualify. Split the lump sum by UK tax year, remove anything that is not income tax, then place each slice in its US year under your cash or accrual basis.

Published guidance on the foreign tax credit stops at one sentence: interest and penalties do not count. That is correct and nowhere near enough. A US citizen in London who has just paid HMRC a six-figure sum across five or six years holds a single bank debit and a letter, and needs a line-by-line schedule that will survive IRS scrutiny. At Jungle Tax, that schedule is the first working paper we build, because each slice of the payment can land in a different US year at a different exchange rate. This guide shows how to build it.

Why does a single HMRC payment need splitting at all?

HMRC collects a settlement as one sum. The US foreign tax credit does not recognise sums; it recognises amounts of qualifying income tax, each tied to a period, a category of income and a date of payment. Four separate questions therefore sit inside one debit:

• Character. Is this amount a tax at all under US principles, or interest, a penalty or a surcharge?
• Levy. If it is a UK charge, is it an income tax? Capital gains tax can be; National Insurance is not treated the same way.
• Period. Which UK tax year does it relate to, and therefore which US year, if any, can carry it?
• Category. Does it relate to general or passive income, or to wages already excluded on Form 2555?

The burden of proof sits with you. Section 905(b) of the Internal Revenue Code allows the credit only where the taxpayer can establish the income and the foreign tax claimed. A figure pulled from a bank statement establishes neither.

Why are interest and penalties not creditable?

The rule starts at the definition of a tax. Under Treas. Reg. §1.901-2, paragraph (a)(2)(i), a levy qualifies only if it is a compulsory payment under a country's taxing authority, judged by US principles rather than by the foreign label. The same paragraph excludes penalties, fines, interest and similar obligations outright. The Instructions for Form 1116 repeat the point for individuals in plain terms.

Three consequences matter in practice:

• The UK label does not rescue the amount. Late payment interest, inaccuracy penalties, failure-to-notify penalties and surcharges all fall on the wrong side of the line, however they are grouped in the offer.
• A tax-geared penalty is still a penalty. That a penalty is computed as a percentage of tax does not give it the character of tax.
• Interest is not a carryover asset. These amounts do not enter Schedule B to Form 1116. They produce no credit in any year, and should not be parked on the form in the hope of using them later.

Any US deduction for the same amounts is a separate question, and a narrow one. For most individual filers, neither element will produce a deduction. We analyse it only where the UK liability arose from a genuine US-recognised trade or business, and we do not assume a result.

What does HMRC paperwork actually show, year by year?

The good news is that HMRC's own procedure pushes towards a breakdown. SIOG9500, updated in July 2026, records that HMRC has withdrawn the old "global offer" in which one sum settled several periods without allocation, and expects settlements to state assessment amounts with interest and penalties calculated separately. If your settlement is recent, the numbers should exist. If it is older, they may exist only in working papers.

Your document set depends on the route to settlement:

Route	What you should hold	What it may hide
Contract settlement after an enquiry	Letter of offer, statement of duties by year, HMRC acceptance, the computation of interest and penalties	Tax, capital gains tax and Class 4 can be one figure; interest and penalties usually sit outside the duties table
Worldwide Disclosure Facility	Your disclosure worksheets, reference numbers, HMRC's acknowledgement and any later letter, payment proof	You calculated it yourself, so HMRC's papers may prove less than your workings do
Amended returns or discovery assessments	Amended calculations, closure notice or assessment, statements of account	Interest may post to the account separately, months later
Instalment arrangement	All of the above plus the agreed schedule and each payment date	Which instalment paid which year

The Enquiry Manual at EM6337 is the page to read against your letter. It explains that the statement of duties normally excludes interest and penalties, that income tax and capital gains tax need not be separated for Self Assessment years, and that tax and Class 4 contributions can be a single figure. EM6339 addresses how interest, penalties and surcharge appear in the offer itself. The Self Assessment Manual confirms that a contract can sweep in additional liability, interest, surcharge and penalties for every affected year. The Worldwide Disclosure Facility guidance requires liabilities to be calculated by tax year, with a penalty rate entered for each.

Supporting records come from your HMRC online account, which offers SA302 calculations and tax year overviews. HMRC distinguishes between the statement and calculation: one shows charges and payments, the other shows how tax was reached. You generally need both.

Five traps inside the statement of duties

• Class 4 inside the tax figure. A combined figure must be unpicked. Self-employment contributions are a social security charge, and the US-UK totalization agreement, not the foreign tax credit, is where they belong.
• Capital gains tax inside the tax figure. The gain may fall in a different US category from the income beside it, so the credit cannot be claimed on one Form 1116.
• Unnamed sources. SIOG9500 accepts that receipts may be recorded as "other income" without identifying a specific source. That is workable in the UK and awkward in the US, where the tax must be assigned to a category of income. The underlying analysis has to come from the enquiry correspondence.
• Additional tax only. For discovery years the schedule shows only the extra duties. The slice is added to tax already borne through PAYE or an original return. It does not replace it.
• Out-of-time tax paid voluntarily. HMRC's manual requires such amounts to be shown separately. Handle these with real care: see the section on compulsory payment below.

Which US year does each slice belong to?

This is where most catch-up files go wrong, because the answer turns on the basis, and the basis has a history. Treas. Reg. §1.905-1 sets out three tracks. The accrual election itself is covered in depth in our guide to the paid versus accrued basis; here we apply it to a settlement.

Track 1: cash basis, including anyone who has never elected accrual

Under paragraph (c)(4), additional tax for a prior year, including tax paid by settling a dispute, is creditable only in the year paid. It does not reopen the earlier year. A payment made in July 2026 for six UK years is a US 2026 credit in its entirety, translated at the spot rate on the payment date, subject to the one-year carryback and ten-year carryforward under section 904(c).

Watch for earlier remittances. Under paragraph (c)(2), a sum remitted to HMRC while a liability is in contest is treated, once the contest is resolved, as paid in the year it was remitted. A deposit made in 2024 to stop interest running may belong to US 2024, not the year the settlement was signed.

Track 2: accrual basis in force for the year concerned

Under paragraph (d)(1), UK tax is fixed at the close of the UK year and accrues in the US year containing that year end. UK 2022/23 ends on 5 April 2023, so it maps to US 2023. Additional tax relates back to that same year under (d)(1)(ii), and a contested amount does so once the contest is resolved and the tax paid, per (d)(3).

Track 3: tax from before the accrual election took effect

This is the gap in almost every published treatment, and it matters most to the reader of this guide. Under paragraph (e)(3), tax that accrued in a year before the election, and is paid in the election year or later, is creditable when paid. It does not relate back. Examples 1 and 2 in (e)(4) work this through, including a later assessment for an old year credited in the year of payment.

So a settlement that spans the election year divides. Years from the election onwards relate back. Earlier years land in the year of payment. A filer can therefore have accrual and paid-year treatment on the same HMRC letter, without any inconsistency.

The 24-month line, and why it moves your exchange rate

Section 905(c)(2) and Treas. Reg. §1.905-3 generally deny credit for accrued tax unpaid 24 months after the close of the US year to which it relates, until it is paid. Once paid, it is taken into account in the year it relates to. The practical effect for a late settlement is on currency. Treas. Reg. §1.986(a)-1 applies the average rate for the year to accrued tax in the ordinary case, but the spot rate on the payment date where tax is paid more than 24 months after that year closes. Most slices of a multi-year settlement will therefore translate at a single spot rate, while the most recent slice may still use an average rate.

Worked example: a five-year settlement, split and allocated

The following figures are our own illustration. They are not drawn from any client, and the interest, penalty and exchange-rate figures are chosen for arithmetic clarity rather than computed from published rates.

A US citizen, resident in London, has never filed a US return or claimed a foreign tax credit. On 14 July 2026 they pay HMRC £431,430 under a settlement for UK 2019/20 to 2023/24, all general category income. They use the Foreign Offshore Procedure for US 2023, 2024 and 2025, and treat 2023 as the first year of a valid accrual election.

Step 1: split by character

UK year	Income tax (£)	Interest (£)	Penalty (£)	Total (£)
2019/20	46,000	12,420	9,200	67,620
2020/21	52,000	11,960	10,400	74,360
2021/22	61,000	11,590	12,200	84,790
2022/23	74,000	9,620	14,800	98,420
2023/24	83,000	6,640	16,600	106,240
Total	316,000	52,230	63,200	431,430

£115,430, or roughly 27% of the cheque, drops out immediately. It never reaches Form 1116.

Step 2: allocate the tax to US years

Assumed rates: spot of $1.35 on 14 July 2026, and an average of $1.28 for 2024.

UK year (tax £)	Track	US credit year	24-month line	Rate	US dollars
2019/20 (46,000)	Pre-election, paid 2026	2026	Not relevant	1.35 spot	62,100
2020/21 (52,000)	Pre-election, paid 2026	2026	Not relevant	1.35 spot	70,200
2021/22 (61,000)	Pre-election, paid 2026	2026	Not relevant	1.35 spot	82,350
2022/23 (74,000)	Relates back	2023	Passed 31 Dec 2025	1.35 spot	99,900
2023/24 (83,000)	Relates back	2024	Open to 31 Dec 2026	1.28 average	106,240
Total					420,790

Step 3: compare the cash-basis result

Had the same person stayed on the cash basis, all £316,000 would be a 2026 credit: $426,600 at spot. That is $5,810 more in nominal dollars, and it is usually worth less. The US 2023 and 2024 returns would then show the income HMRC taxed with no matching settlement credit, and so potentially US tax and interest on those returns. The whole credit would sit in 2026 instead, where it can be absorbed only up to that year's limitation, carried back one year to 2025 or carried forward. It cannot reach 2023 or 2024.

Even under the split shown, $214,650 lands in 2026 against whatever US liability and limitation that year has. In most UK-resident cases, ordinary 2026 UK tax has already used much of the limitation, so the excess goes to Schedule B. If part is carried back, the 2025 return needs amending after the 2026 return is prepared.

Two return-preparation points follow. The filing set is a live question: including earlier years could change which year is first, and therefore which slices relate back. And the sequence of the returns matters, because the 2026 figures feed the 2025 carryback, not the other way round.

Is the tax element always creditable?

Not automatically. Stripping out interest and penalties is necessary but not sufficient, because a credit requires that the amount paid did not exceed the true UK liability. Under Treas. Reg. §1.901-2, paragraph (e)(5), an amount above the liability under foreign law is not compulsory. The taxpayer must have applied UK law reasonably and pursued effective and practical remedies, and where several issues are settled together they are assessed overall. Settling a real dispute at a commercial figure should not by itself be fatal, but it does need support.

Three settlement features deserve a specific look:

• Voluntary out-of-time tax. If a year was beyond HMRC's assessing powers and the tax was included voluntarily, it is hard to describe as compulsory. We would expect to treat that slice as at risk, and we would not claim it without analysis.
• Unclaimed treaty relief. If UK tax was settled without taking relief available under the US-UK treaty or for US tax on US-source income, part of it may be avoidable, and voluntarily forgoing a benefit is what the regulation targets.
• The contract form itself. A contract settlement replaces proceedings with an agreement. We have found no authority treating that form as disqualifying where the sum matches the assessments that would otherwise have been made, and SIOG9500 supports that framing, but the file should show the link between each sum and the underlying liability.

How do the US and UK treat each element?

Element	UK / HMRC treatment	US / IRS treatment
Income tax and capital gains tax	The underlying liability, calculated by UK tax year to 5 April	Creditable if compulsory, allocated by category and US year
Class 4 and other National Insurance	Can be combined with tax in the statement of duties	Remove; address under the totalization agreement
Interest	Runs from the due date to payment; non-negotiable per HMRC's guidance	Not a tax; no credit
Penalties and surcharges	Behaviour-based; negotiable within statute, set out separately	Not a tax; no credit
Timing	Liability attaches to the UK year	Year paid, or year of accrual with relation back, depending on basis
Currency	Sterling	Spot on payment or average for the year, depending on the 24-month line
Later change	Further assessment, amendment or repayment	May require notification and amended return

How do we build the allocation file?

1. Collect the paper. Offer, acceptance, computations, statements of account and bank proof of each payment date.
2. Reconcile to the penny. Tax, interest and penalties by year must sum to what left the bank. Any unexplained residue goes to HMRC as a query, not to the credit.
3. Strip non-income-tax charges. Class 4, Class 2, student loan amounts and any other non-income levy.
4. Divide by category. Use the UK computation to attribute tax to wages, investment income and gains on a defensible basis, excluding tax on income excluded under Form 2555.
5. Fix the track for each slice. Basis history, election year, remittance dates and the 24-month line.
6. Translate. Record the rate source and method, because the Form 1116 instructions call for an explanation of conversions.
7. Tie to income. The foreign income on each US return must agree with the income HMRC taxed for the matching period. A credit without its income is a query waiting to happen.
8. Roll Schedule B. Carry the credit forward from the first filed year, by category.

When no year-by-year breakdown exists

Older settlements, or those reached through a representative whose file has gone, can arrive with only a total. There is no IRS formula for spreading a lump sum, and a simple pro-rata split is not evidence. The sequence we use is to ask HMRC in writing for the computation and how the payment was allocated; to rebuild the tax for each year from the amended income; and to compute interest separately from HMRC's published rates, leaving penalty as the balance to be tested against the correspondence. Anything that cannot be supported is treated as non-creditable. A smaller claim with a clean file is worth more than a larger one without it.

When the settlement was paid in instalments

Each payment has its own date, so its own year on the cash basis and its own spot rate where that applies. We have not found a US rule prescribing which UK year a part payment settles, so HMRC's allocation, ideally confirmed in writing, is the best evidence. Instalments also straddle the 24-month line: on the accrual track, a slice part-paid before the cut-off and part-paid after it will not translate at one rate.

What if the US returns are already filed?

The analysis above assumes the settlement figures are known before the US returns go in, which is the clean case. If a credit has already been claimed and HMRC then changes the number, repays part of it, or an accrued amount goes unpaid, a separate reporting regime applies. We cover it in our guide to section 905(c) foreign tax redeterminations, including Schedule C, deadlines and penalties.

Note the distinction. On a true cash track, a later additional payment does not redetermine the earlier year; it is simply a credit for the payment year. On an accrual track, it does relate back, which is why the same HMRC letter can create an amended return for one reader and nothing but a current-year entry for another.

How does this fit a streamlined submission?

The Streamlined Filing Compliance Procedures require three years of returns and six years of FBARs for a non-resident filer, and these usually sit beside a UK settlement in exactly the period under review. Streamlined filing imposes no special rule on the credit, but the settlement can leave fingerprints on the package. Income on the returns must be consistent with what was disclosed to HMRC. Credits on Form 1116 must tie to the allocation file. And the non-wilful statement should be drafted with the UK history in view, because a UK penalty resting on deliberate behaviour raises a question the certifying taxpayer must be able to answer honestly.

Where the numbers are large, we run both sides as one instruction across our UK tax services and high net worth teams, so that the UK offer letter and the US file are drafted with each other in mind rather than reconciled afterwards.

Ready to turn the HMRC letter into a defensible schedule?

If you have paid HMRC, or are about to, and your US returns are outstanding, the split belongs at the front of the work rather than the end. Send us the letter of offer and the payment record. We will map every slice to its US year, identify what is at risk, and prepare the returns on that footing. To arrange a confidential consultation, contact our cross-border team.