This article is relevant to those of you who are taking TX-UK in an exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).
The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.
A question could require you to identify the number of associated companies in a group, or it may tell you how many associated companies there are and then ask you to justify this number. Unless answering an objective test question, make sure you explain why companies are both included and excluded when answering.
The lower and upper corporation tax limits are effectively shared if a company has associated companies, thus affecting the rate of corporation tax.
For the financial year 2023, the small profits rate of 19% applies where a company’s augmented profits do not exceed the lower limit of £50,000. The main rate of 25% applies where a company’s augmented profits are £250,000 or more (the upper limit). Marginal relief eases the transition from the small profits rate to the main rate of corporation tax where augmented profits fall between £50,000 and £250,000.
Do not forget to include the parent company in the number of associated companies.
Associated companies are also relevant when it comes to the requirement for large companies to make quarterly instalment payments of their corporation tax liability.
The requirement arises if a company’s augmented profits exceed a profit threshold of £1,500,000, with this threshold divided by the number of associated companies at the end of the immediately preceding accounting period. However, for any question involving quarterly instalment payments, the number of associated companies will be given.
As already explained, augmented profits are relevant to establishing the rate of corporation tax payable, and also when it comes to the requirement to make quarterly instalment payments.
Augmented profits are a company’s taxable total profits plus dividends received. However, dividends received from 51% group companies are excluded.
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.
Remember that group relief is not restricted according to the percentage shareholding. Therefore, if a parent company has a trading loss, 100% of that loss can be surrendered to a 75% subsidiary company, and if a 75% subsidiary company has a trading loss, 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
When the accounting periods of the claimant company and the surrendering company are not coterminous, group relief may be restricted. There may also be a restriction where an accounting period is less than 12 months long.
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 of its own current year or brought forward losses which it has, even if such a loss relief claim is not actually made.
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.
Group relief planning
The most important factor to be taken into account when considering group relief claims is the rate of corporation tax payable by the claimant companies. Group relief should therefore be surrendered as follows:
Another, generally less important, factor is the timing and cash flow in relation to the relief obtained (an earlier claim is normally preferable).
The loss-making company may of course be able to relieve the loss itself. In this case, the extent to which relief for qualifying charitable donations is lost will also be relevant.
Note that any claim made against total profits prior to 1 April 2023 will only obtain relief at 19% (for the financial years 2021 and 2022, the rate of corporation tax was 19%, with this single rate applied regardless of the level of a company’s profits).
It is important to remember that capital losses cannot be group relieved.
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:
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