This article is relevant to those of you taking TX-UK in an exam in the period 1 June 2020 to 31 March 2021, and is based on tax legislation as it applies to the tax year 2019–20 (Finance Act 2019).
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 2020, 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 2019.
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:
For the year ended 31 March 2020, Fruit Ltd has an unrelieved trading loss.
Group relief group
Chargeable gains group
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.
It is possible to surrender both current year losses and carried forward losses, although the rules are slightly different in each case.
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 2020, 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 2020 claimed group relief of £40,000 from this company.
The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2020 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 19%) | 95,000 |
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 2020, Sofa Ltd had a trading loss of £200,000.
For the year ended 30 June 2019, Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2020 will have taxable total profits of £90,000.
Futon Ltd commenced trading on 1 January 2020, and for the three-month period ended 31 March 2020 had taxable total profits of £60,000.
Futon Ltd did not commence trading until 1 January 2020, so group relief is restricted to a maximum of £50,000, being the lower of £60,000 and £50,000 (200,000 x 3/12). The coterminous period is 1 January to 31 March 2020.
However, the ability to set off carried forward losses could circumvent these restrictions, with further group relief maybe possible against Settee Ltd’s taxable total profits for the period 1 April to 30 June 2020.
As well as trading losses, it is possible to surrender unrelieved property business losses and qualifying charitable donations.
In working out the taxable total profits against which group relief can be claimed, the claimant company is assumed to use any current year or brought forward 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 2020 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
Carried forward trading losses and property business losses can be surrendered as group relief to the extent that they cannot be set off against the surrendering company’s own total profits for the period in question.
As for a current year claim, the claimant company is assumed to use any current year or brought forward losses which it has, even if such a loss relief claim is not actually made.
The claimant company and the surrendering company must have a common overlapping accounting period.
Qualifying charitable donations cannot be carried forward.
EXAMPLE 6
Noo Ltd owns 100% of the ordinary share capital of Oon Ltd. Both companies commenced trading on 1 April 2018. The results of each company for the years ended 31 March 2019 and 2020 are:
Year ended 31 March 2019 £ | Year ended 31 March 2020 £ |
|
|---|---|---|
| Noo Ltd | ||
| Trading profit | 28,800 | 93,800 |
| Property business income | 4,600 | 5,200 |
| Oon Ltd | ||
| Trading profit/(loss) | (62,900) | 13,300 |
| Property business income/(loss) | (13,600) | 1,700 |
Year ended 31 March 2019
Year ended 31 March 2020
Because of the single rate of corporation tax of 19%, 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 7
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 8
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to 31 March.
On 15 August 2019, Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20 February 2020, Stick Ltd sold a factory and this resulted in a capital loss of £35,000.
As at 1 April 2019, 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 examination.
Written by a member of the TX-UK examining team