This article is relevant to those of you who are taking TX-UK in an exam in the period 1 June 2026 to 31 March 2027 and in June 2027, and is based on tax legislation as it applies to the tax year 2025-26 (Finance Act 2025).
Associated companies
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 2025, 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.
- Companies are associated if they are under the same control. This basically means a shareholding of more than 50%.
- Companies that are only associated for part of an accounting period count as associated companies for the whole of that period.
- Dormant companies (not carrying on a trade or business) do not count as associated companies.
- For associated company purposes, it is irrelevant where a company is resident. Therefore, companies which are resident overseas can be included.
Do not forget to include the parent company in the number of associated companies.
Example 1Music Ltd has the following shareholdings:
Music Ltd’s shareholding in Cello Ltd was disposed of on 31 December 2025, and the shareholding in Drum Ltd was acquired on 1 January 2026. The other shareholdings were all held throughout the year ended 31 March 2026. Echo Inc is resident overseas. The other companies are all resident in the UK. All the companies are trading companies except for Flute Ltd which is dormant.
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Quarterly instalment payments
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.
Example 2For the year ended 31 March 2026, Quarter Ltd has taxable total profits of £480,000 and dividends (from non-group companies) of £40,000. The company had the same level of profits for the year ended 31 March 2025. Quarter Ltd has had two associated companies for several years. Quarter Ltd is classed as a large company for the year ended 31 March 2026 because its augmented profits of £520,000 (480,000 + 40,000) exceed the profit threshold of £500,000 (1,500,000/3). Quarterly instalment payments in respect of its corporation tax liability therefore have to be made.
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Dividends from 51% group companies
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.
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 3Fruit Ltd is the parent company for a group of companies. The group structure is: Fruit Ltd For the year ended 31 March 2026, Fruit Ltd has an unrelieved trading loss. Group relief group
Chargeable gains group
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Group relief
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
Example 4For the year ended 31 March 2026, Ballpoint Ltd has a trading profit of £110,000, 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 2026 claimed group relief of £40,000 from this company. During the year ended 31 March 2026, Ballpoint Ltd received dividends of £4,000 from non-group companies, and dividends of £8,000 from its 100% subsidiary company. The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2026 is:
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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.
Example 5Sofa Ltd owns 100% of the ordinary share capital of both Settee Ltd and Futon Ltd. For the year ended 31 March 2026, Sofa Ltd had a trading loss of £200,000. For the year ended 30 June 2025, Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2026 will have taxable total profits of £90,000. Futon Ltd commenced trading on 1 January 2026, and for the three-month period ended 31 March 2026 had taxable total profits of £60,000.
Futon Ltd did not commence trading until 1 January 2026, 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 2026. 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 of its own current year or brought forward losses which it has, even if such a loss relief claim is not actually made.
Example 6Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the year ended 31 March 2026 are:
All the loan interest receivable is in respect of loans which were made for non-trading purposes. Maximum claim by Mon Ltd
Maximum surrender by Lae Ltd
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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 7Noo Ltd owns 100% of the ordinary share capital of Oon Ltd. Both companies commenced trading on 1 April 2024. The results of each company for the years ended 31 March 2025 and 2026 are:
Year ended 31 March 2025
Year ended 31 March 2026
Note that Oon Ltd’s loss has been relieved as early as possible. However, from a group relief planning perspective (see the next section), it would be beneficial to carry forward the entire loss and surrender a higher amount to Noo Ltd for the year ended 31 March 2026. The amount surrendered of £51,500 (52,900 + 13,600 – 15,000) would then be relieved entirely at the marginal corporation tax rate of 26.5% (the lower limit being reduced to £25,000 (50,000/2)). Any loss surrendered for the year ended 31 March 2025 only attracts relief at the rate of 19% because the augmented profits are less than £25,000 (18,800 + 4,600 = £23,400). |
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:
- Initially to companies subject to corporation tax at the marginal rate of 26.5% (the rate will vary slightly if a company has dividends that are not from 51% group companies).
- Surrender should then be to those companies subject to the main rate of corporation tax of 25%.
- The amount surrendered should be sufficient to bring the claimant company’s augmented profits down to the lower limit.
- Any remaining loss should be surrendered to those companies subject to corporation tax at the small profits rate of 19%.
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.
Example 8Colour Ltd owns 100% of the ordinary share capital of both Orange Ltd and Pink Ltd. The results of each company for the year ended 31 March 2026 are:
During the year ended 31 March 2026, Colour Ltd received dividends of £2,000 from non-group companies. The corporation tax liability of each of the group companies for the year ended 31 March 2026 (using the trading loss on the most beneficial basis) is as follows:
Although Colour Ltd cannot restrict the loss relief claim made against its own total profits, the desired result can be achieved by making appropriate group relief claims with Orange Ltd and Pink Ltd. |
Chargeable assets
It is important to remember that capital losses cannot be group relieved.
Example 9Why 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?
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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 10Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to 31 March. On 15 August 2025, Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20 February 2026, Stick Ltd sold a factory and this resulted in a capital loss of £35,000. As at 1 April 2025, Stick Ltd had unused capital losses of £40,000.
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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
