Calculation confusion

I submitted a 2007 trust return for a discretionary trust with dividend and savings income to HMRC.

The dividend income was £1 156 net the savings income was £4 097 net and the trust management expenses (which were 'properly chargeable to income') were £2 680.
An income distribution was made to a beneficiary of £2 611.

The tax pool brought forward at 6 April 2006 was £553.67 and I calculated the tax pool as at 5 April 2007 to be £280.55. (Ed Note: the calculation is on the website version of this query.)

HMRC have disagreed with my calculations and have disallowed £380.98 in relation to the tax deducted at source on the savings income covered by trust management expenses in respect of the tax pool calculation.

HMRC state that the reason for this disallowance is that under TA 1988 s 686D only tax paid can...