This article is relevant to candidates sitting Paper F6 (UK) in an exam in the period 1 April 2015 to 30 June 2016, and is based on tax legislation as it applies to the tax year 2014–15 (Finance Act 2014).
A question may 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 a Section A multiple-choice question, make sure you explain why companies are both included and excluded when answering this type of question.
The lower and upper corporation tax limits are divided by the number of associated companies, thus affecting the rate of corporation tax. Do not forget to include the parent company in the number of associated companies.
Music plc has the following shareholdings:
Music plc’s shareholding in Cello Ltd was disposed of on 31 December 2014, and the shareholding in Drum Ltd was acquired on 1 January 2015. The other shareholdings were all held throughout the year ended 31 March 2015.
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.
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.
Fruit Ltd is the parent company for a group of companies. The group structure is as follows:
For the year ended 31 March 2015 Fruit Ltd has an unrelieved trading loss.
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 2015 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 2015 claimed group relief of £40,000 from this company.
During the year ended 31 March 2015 Ballpoint Ltd received dividends of £27,000 from an unconnected 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 2015 is as follows:
|Qualifying charitable donations||(2,000)|
|Taxable total profits||500,000|
|Franked investment income (27,000 x 100/90)||30,000|
|Corporation tax at (500,000 at 21%)||105,000|
1/400 (750,000 – 530,000)
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.
Sofa Ltd owns 100% of the ordinary share capital of both Settee Ltd and Futon Ltd. For the year ended 31 March 2015 Sofa Ltd had a trading loss of £200,000.
For the year ended 30 June 2014 Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2015 will have taxable total profits of £90,000.
Futon Ltd commenced trading on 1 January 2015, and for the three-month period ended 31 March 2015 had taxable total profits of £60,000.
As well as trading losses, it is possible to surrender unrelieved property business losses and qualifying charitable donations. Only current year losses can be group relieved, so no relief is available for trading losses brought forward from previous years.
In working out the taxable total profits against which group relief can be claimed, the claimant company is assumed to use any current year losses that it has, even if such a loss relief claim is not actually made.
Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the year ended 31 March 2015 are as follows:
|Property business profit/(loss)||(26,700)||60,900|
|Loan interest receivable||1,600||3,300|
|Qualifying charitable donations||(4,800)||(3,200)|
All the loan interest receivable is in respect of loans that were made for non-trading purposes.
Maximum claim by Mon Ltd
Maximum surrender by Lae Ltd
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:
The loss making company may of course be able to relieve the loss itself. In this case consideration will also have to be given to 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.
Remember that unlike other loss relief claims, it is possible to specify the amount of group relief that is to be surrendered. The surrendering company can therefore restrict group relief so that it retains sufficient losses in order to bring its augmented profits down to the small profits rate limit.
Colour 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 2015 are as follows:
|Property business profit||120,000||0||0|
Colour Ltd had franked investment income of £10,000.
The corporation tax liability of each of the group companies for the year ended 31 March 2015 is as follows:
|Property business profit||120,000|
|Taxable total profits||90,000||575,000||100,000|
|Franked investment income||10,000||0||0|
It is important to remember that capital losses cannot be group relieved.
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?
However, an asset does not actually have to be moved between 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 as follows:
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. For the year ended 31 March 2015 Rod Ltd will pay corporation tax at the main rate of 21% while Stick Ltd will pay corporation tax at the small profits rate of 20%.
On 15 August 2014 Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20 February 2015 Stick Ltd sold a factory and this resulted in a capital loss of £35,000.
As at 1 April 2014 Stick Ltd had unused capital losses of £40,000.
With groups it is important that you know the group relationship that must exist for reliefs to be available. Where a Section B 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 exam.
Written by a member of the Paper F6 (UK) examining team