This article is relevant to candidates sitting F6 (UK) in an exam in the year 1 April 2017 to 31 March 2018, and is based on tax legislation as it applies to the tax year 2016–17 (Finance Act 2016).
The only relevance of having 51% group companies is in relation to the requirement for large companies to make quarterly instalment payments of their corporation tax liability.
A large company is basically one whose profits are more than £1,500,000, but this limit is divided by the number of 51% group companies.
Example 1
For the year ended 31 March 2017, Largish Ltd has taxable total profits of £380,000. Largish Ltd has three 51% group companies. The company had the same level of profits for the year ended 31 March 2016.
Largish Ltd will be required to make quarterly instalment payments in respect of its corporation tax liability because its profits of £380,000 exceed the profit limit of £375,000 (1,500,000/4).
There are two types of group relationship:
The definition of a 75% subsidiary company for chargeable gains purposes is looser than that for group relief purposes. This is because the required 75% shareholding need only be met at each level in the group structure.
Example 2
Fruit Ltd is the parent company for a group of companies. The group structure is:
Fruit Ltd
|
100%
|
Apple Ltd
|
80%
|
Banana Ltd
|
80%
|
Cherry Ltd
For the year ended 31 March 2017, Fruit Ltd has an unrelieved trading loss.
Group relief
Chargeable gains
Remember that group relief is not restricted according to the percentage shareholding. Therefore, if a parent company has a trading loss, then 100% of that loss can be surrendered to a 75% subsidiary company, and if a 75% subsidiary company has a trading loss, then 100% of that loss can be claimed as group relief by the parent company.
Unlike other loss relief claims, the claimant company claims group relief against its taxable total profits after the deduction of any qualifying charitable donations.
Example 3
For the year ended 31 March 2017, Ballpoint Ltd has a trading profit of £510,000, a chargeable gain of £32,000, and paid qualifying charitable donations of £2,000.
Ballpoint Ltd has a 100% subsidiary company, and for the year ended 31 March 2017 claimed group relief of £40,000 from this company.
The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2017 is:
| £ | ||
|---|---|---|
| Trading profit | 510,000 | |
| Chargeable gain | 32,000 | |
| 542,000 | ||
| Qualifying charitable donations | (2,000) | |
| 540,000 | ||
| Group relief | (40,000) | |
| Taxable total profits | 500,000 | |
| Corporation tax at (500,000 at 20%) | 100,000 |
When the accounting periods of the claimant company and the surrendering company are not coterminous, then group relief may be restricted. There may also be a restriction where an accounting period is less than 12 months long.
Example 4
Sofa Ltd owns 100% of the ordinary share capital of both Settee Ltd and Futon Ltd. For the year ended 31 March 2017, Sofa Ltd had a trading loss of £200,000.
For the year ended 30 June 2016, Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2017 will have taxable total profits of £90,000.
Futon Ltd commenced trading on 1 January 2017, and for the three-month period ended 31 March 2017 had taxable total profits of £60,000.
As well as trading losses, it is possible to surrender unrelieved property business losses and qualifying charitable donations. Only current year losses can be group relieved, so no relief is available for trading losses brought forward from previous years.
In working out the taxable total profits against which group relief can be claimed, the claimant company is assumed to use any current year losses which it has, even if such a loss relief claim is not actually made.
Example 5
Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the year ended 31 March 2017 are:
| Lae Ltd £ | Mon Ltd £ | ||
|---|---|---|---|
| Trading loss | (18,100) | (11,200) | |
| Property business income/(loss) | (26,700) | 60,900 | |
| Loan interest receivable | 1,600 | 3,300 | |
| Capital loss | (19,200) | 0 | |
| Qualifying charitable donations | (4,800) | (3,200) |
All the loan interest receivable is in respect of loans that were made for non-trading purposes.
Maximum claim by Mon Ltd
Maximum surrender by Lae Ltd
Because of the single rate of corporation tax of 20%, the rate of corporation tax is not a factor when it comes to the choice between loss reliefs or when considering group relief claims. The only relevant factors are the timing of the relief obtained (an earlier claim is generally preferable), and the extent to which relief for qualifying charitable donations will be lost.
It is important to remember that capital losses cannot be group relieved.
Example 6
Why would it be beneficial for all of the eligible companies in a chargeable gains group to transfer assets to one company prior to them being disposed of outside of the group?
However, an asset does not actually have to be moved between group companies in order to match chargeable gains and capital losses. It is possible for two companies in a chargeable gains group to make a joint election so that matching is done on a notional basis.
The election has to be made within two years of the end of the accounting period in which the asset is disposed of outside the group, and will specify which company in the group is treated for tax purposes as making the disposal.
The advantages of the election compared to actually transferring an asset between group companies (prior to disposal outside of the group) are:
Example 7
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to 31 March.
On 15 August 2016, Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20 February 2017, Stick Ltd sold a factory and this resulted in a capital loss of £35,000.
As at 1 April 2016, Stick Ltd had unused capital losses of £40,000.
With groups it is important that you know the group relationship which must exist for reliefs to be available. Where a longer-style question involves a group, you can expect to spend more time than normal planning your answer. However, working through the examples in this article will prepare you for what could be set in the exam.
Written by a member of the F6 (UK) examining team