Music plc’s shareholding in Cello Ltd was disposed of on 31 December 2013, and the shareholding in Drum Ltd was acquired on 1 January 2014. The other shareholdings were all held throughout the year ended 31 March 2014.
Echo Inc. is resident overseas. The other companies are all resident in the United Kingdom.
All the companies are trading companies except for Flute Ltd which is dormant.
- Alto Ltd and Flute Ltd are not associated companies as Music Ltd has a shareholding of less than 50% in Alto Ltd, and Flute Ltd is dormant.
- Bass Ltd, Cello Ltd, Drum Ltd and Echo Inc. are associated companies as Music Ltd has a shareholding of over 50% in each case, and they are all trading companies.
- For associated company purposes, it does not matter where a company is resident. Echo Inc. is therefore included despite being resident overseas.
- Companies that are only associated for part of an accounting period, such as Cello Ltd and Drum Ltd, count as associated companies for the whole of the period.
- Including Music Ltd there are five associated companies, so Music Ltd’s lower and upper corporation tax limits are reduced to £60,000 (300,000/5) and £300,000 (1,500,000/5) respectively.
Definition of a 75% group
There are two types of group relationship:
- The 75% group relationship that is necessary to claim group relief.
- The 75% group relationship that 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.
Fruit Ltd is the parent company for a group of companies. The group structure is as follows:
For the year ended 31 March 2014 Fruit Ltd has an unrelieved trading loss.
- 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 will therefore be able to group relief its trading loss to Apple Ltd and/or Banana Ltd.
- Fruit Ltd does not have the required 75% shareholding in Cherry Ltd (100% x 80% x 80% = 64%).
- Companies form a chargeable gains group if at each level in the group structure there is a 75% shareholding.
- However, Fruit Ltd, 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.
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.
For the year ended 31 March 2014 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 2014 claimed group relief of £40,000 from this company.
During the year ended 31 March 2014 Ballpoint Ltd received dividends of £27,000 from an unconnected UK company, and dividends of £18,000 from its 100% subsidiary company. Both figures are the actual cash amounts received.
The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2014 is as follows: