Who has the right of way?

It is an area that I feel is very unclear.
Large roundabouts don't pose a problem it is the small and mini roundabouts. The highway code states that you should when arriving at a roundabout you should give priority to traffic approaching from your right. How far away from approaching the roundabout should you observe?
In this example I am approaching but is not on the roundabout, the other car is just on the roundabout. So who has the right of way?
I was actually set to allow the car to pass in front of me and I would carry on. The driver was suddenly aware of my presence and stopped. He did wave an apology.

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