Test your understanding: answers
(1). Trading losses cannot be surrendered to K Co unless it has a permanent establishment in the UK.
Trading losses can be surrendered to FG Ltd because it is resident in the UK.
(2). The trading losses should be surrendered to P Ltd. Relief will be obtained at the main rate in respect of £7,500 (£195,000 – £187,500) of losses and at the marginal rate in respect of the balance of £22,500 (£30,000 – £7,500).
| £ | ||
|---|---|---|
| On profits above the upper limit (£7,500 x 21%) | 1,575 | |
| On profits between the limits (£22,500 x 21.25%) | 4,781 | |
| Total tax saved | 6,356 |
(It should be noted that the same amount of tax would be saved if £9,500 of the losses were surrendered to Q Ltd and the balance to P Ltd.)
Surrendering all of the losses to Q Ltd would result in relief at the marginal rate in respect of £9,500 (£47,000 – £37,500) and at the small company rate in respect of the balance of £20,500 (£30,000 – £9,500).
| £ | ||
|---|---|---|
| On profits between the limits (£9,500 x 21.25%) | 2,019 | |
| On profits below the lower limit (£20,500 x 20%) | 4,100 | |
| Total tax saved | 6,119 |
(3). The corporation tax limits for RT Ltd for the 10 months ended 31 January 2015 are:
Upper limit £250,000 (£1,500,000 x 1/5 x 10/12)
Lower limit £50,000 (£300,000 x 1/5 x 10/12)
From the point of view of loss utilisation, RT Ltd can be regarded as paying corporation tax at the following rates.
| £ | ||
|---|---|---|
| On profits up to the lower limit (£50,000 x 20%) | 10,000 | |
| On profits between the limits (£120,000 x 21.25%) | 25,500 | |
| Total liability | 35,500 |
The losses will first relieve the profits taxed at the marginal rate (£120,000) and then £20,000 of the profits taxed at the marginal rate as set out below.
| £ | ||
|---|---|---|
| On profits between the limits (£120,000 x 21.25%) | 25,500 | |
| On profits below the lower limit (£20,000 x 20%) | 4,000 | |
| Total tax saved | 29,500 |
