Groups

This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2022 to 31 March 2023, and is based on tax legislation as it applies to the tax year 2021–22 (Finance Act 2021).

51% group companies

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 2022, Largish Ltd has taxable total profits of £380,000. Largish Ltd has had three 51% group companies since 2019. The company had the same level of profits for the year ended 31 March 2021.

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).

Definition of a 75% group

There are two types of group relationship:

• The 75% group relationship which is necessary to claim group relief.
• The 75% group relationship which is necessary for chargeable gains purposes.

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 2022, Fruit Ltd has an unrelieved trading loss.

Group relief group

• For group relief purposes, one company must be a 75% subsidiary of the other, or both companies must be 75% subsidiaries of a third company.
  
  
• The parent company must have an effective interest of at least 75% of the subsidiary’s ordinary share capital.
  
  
• The parent company must also have the right to receive at least 75% of the subsidiary’s distributable profits and net assets on a winding up.
  
  
• Fruit Ltd’s trading loss is available as group relief to Apple Ltd and Banana Ltd.
  
  
• Fruit Ltd does not have the required 75% shareholding in Cherry Ltd (100% x 80% x 80% = 64%).

Chargeable gains group

• Companies form a chargeable gains group if at each level in the group structure there is a 75% shareholding.
  
  
• However, the parent company must have an effective interest of over 50% in each subsidiary company.
  
  
• Fruit Ltd, Apple Ltd, Banana Ltd and Cherry Ltd therefore form a chargeable gains group.

Group relief

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.

Current year claims

EXAMPLE 3
For the year ended 31 March 2022, 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 2022 claimed group relief of £40,000 from this company.

The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2022 is: 

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 2022, Sofa Ltd had a trading loss of £200,000.

For the year ended 30 June 2021, Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2022 will have taxable total profits of £90,000.

Futon Ltd commenced trading on 1 January 2022, and for the three-month period ended 31 March 2022 had taxable total profits of £60,000.

• The accounting periods of Settee Ltd and Sofa Ltd are not coterminous. Therefore, Settee Ltd’s taxable total profits and Sofa Ltd’s trading loss must be apportioned on a time basis.
  
  
• For the year ended 30 June 2021, group relief is restricted to a maximum of £50,000, being the lower of £60,000 (240,000 x 3/12) and £50,000 (200,000 x 3/12). The coterminous period is 1 April to 30 June 2021.
  
  
• For the year ended 30 June 2022, group relief is restricted to a maximum of £67,500, being the lower of £67,500 (90,000 x 9/12) and £150,000 (200,000 x 9/12). The coterminous period is 1 July 2021 to 31 March 2022.

Futon Ltd did not commence trading until 1 January 2022, 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 2022.

Any of the trading losses which Sofa Ltd does not surrender can be carried forward and may be available as group relief against the future taxable total profits of Setee Ltd and Futon Ltd (see below).

As well as trading losses, it is possible to surrender unrelieved property business losses and unrelieved 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 2022 are:

All the loan interest receivable is in respect of loans that were made for non-trading purposes.

Maximum claim by Mon Ltd

• The group relief claim by Mon Ltd is calculated after deducting qualifying charitable donations, and on the assumption that a claim is made for the current year trading loss.
  
• The maximum amount of group relief which can be claimed by Mon Ltd is therefore £49,800 (60,900 + 3,300 – 3,200 – 11,200).

Maximum surrender by Lae Ltd

• The property business loss and the qualifying charitable donations can be surrendered to the extent that they are unrelieved, so £29,900 of these can be surrendered (26,700 + 4,800 – 1,600).
  
• It is not possible to surrender capital losses as part of a group relief claim.
  
• The maximum potential surrender by Lae Ltd is £48,000 (18,100 + 29,900).
  
• The maximum group relief claim is therefore £48,000.

Carry forward claims
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 2020. The results of each company for the years ended 31 March 2021 and 2021 are:

Year ended 31 March 2021

• Oon Ltd can surrender £33,400 (28,800 + 4,600) of its losses to Noo Ltd.
• Losses of £43,100 (62,900 + 13,600 – 33,400) are carried forward.

Year ended 31 March 2022

• Oon Ltd must initially set the carried forward losses against its own total profits of £15,000 (13,300 + 1,700).
• The remaining losses of £28,100 (43,100 – 15,000) can be surrendered to Noo Ltd, reducing that company’s taxable total profits to £70,900 (93,800 + 5,200 – 28,100).

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.

Chargeable assets

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?              

• The transfers will not give rise to any chargeable gain or capital loss.
• Arranging that wherever possible, chargeable gains and capital losses arise in the same company will result in the optimum use being made of capital losses.
• These can either be offset against chargeable gains of the same period or carried forward against future chargeable gains.

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:

• The two-year time limit for making an election means that tax planning regarding the set off of capital losses and chargeable gains can be done retrospectively.
• The administrative and legal costs involved with an actual transfer of an asset can be avoided.

EXAMPLE 8
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to 31 March.

On 15 August 2021, Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20 February 2022, Stick Ltd sold a factory and this resulted in a capital loss of £35,000.

As at 1 April 2021, Stick Ltd had unused capital losses of £40,000.

• Rod Ltd and Stick Ltd must make a joint election by 31 March 2024, being two years after the end of the accounting period (the year ended 31 March 2022) in which the disposal outside of the group occurred.
• Stick Ltd’s otherwise unused capital loss of £35,000 and brought forward capital losses of £40,000 can be set against the chargeable gain of £120,000.

Conclusion

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