Corporation tax – Group relief (for Advanced Taxation - United Kingdom (ATX-UK) (P6))

Part 1 of 4

This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Advanced Taxation – United Kingdom (ATX-UK) (P6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting ATX-UK (P6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).

From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Advanced Taxation – United Kingdom (ATX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be P6 Advanced Taxation (UK). Since this name change takes place during the validity of this article, ATX-UK (P6) has been used throughout.

Groups of companies are an important aspect of corporation tax within the ATX-UK (P6) exam. Having studied the basics of this area at F6 (UK) you are now expected to progress to more advanced aspects. However, the basic rules continue to be of vital importance as they are the foundation on which the additional rules rest. You must have a sound knowledge of the many rules within this subject if you are to be able to handle an exam question involving groups.

This is not an introductory article; it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. It begins by briefly summarising the rules relating to both group relief groups and chargeable gains groups. It then goes on to consider a number of group relief tax planning issues that could be introduced in an exam question. It does not include comprehensive explanations of the rules but assumes a reasonable knowledge.

This article is intended to be read proactively, ie statements made should be confirmed as true by reference to the reader’s understanding of the rules, or to a relevant study text. This approach will enable future situations to be analysed from first principles rather than by reference to a rigid set of memorised planning points.

The tax rates and limits for financial year 2017, ending on 31 March 2018, are used throughout this article.

THE BASIC RULES

Figure 1 shows the structure of the H Ltd group of companies. It should be assumed that all of the companies in the group are resident in the UK. The minority shareholders in the group companies are companies with no relationship with H Ltd.

You should be able to review the group structure and confidently identify the members of any group relief groups and capital gains groups; do this before you read the information in Table 1.


Figure 1: The structure of the H Ltd group of companies

p6-corptax-pt1-fig1

 

Table 1: Group relief and capital gains group re Figure 1

 

Group relief group

Capital gains group

The groups

• H Ltd, A Ltd and C Ltd form a group.

• A Ltd and B Ltd form a separate group.

• H Ltd, A Ltd, B Ltd and C Ltd form a single group.


 
Rationale










 
• B Ltd is not in a group with H Ltd because the effective interest of H Ltd in B Ltd is less than 75%.







 

• B Ltd is in a group with H Ltd because:

   - H Ltd has a direct interest in A Ltd of at least 75% and A Ltd has a direct interest in B Ltd of at least 75%, and

   - The effective interest of H Ltd in B Ltd is greater than 50%.

Once a group relief group exists, the following applies:

  • any company in the group can surrender current period trading losses, non-trading deficits on loan relationships, excess property business losses, excess management expenses, and excess gift aid donations to any other company in the group
  • the maximum surrender to a group company is that company’s taxable total profits. For this purpose, a company’s taxable total profits are reduced by its own trading losses for the current period regardless of whether or not such a loss claim is made.

Conclusion

It is vital to be able to identify the members of a group relief group and a capital gains group. It is then necessary to consider the planning opportunities available to the companies concerned. These opportunities are considered in the remaining parts of this article.

Note: Corporation tax issues are considered in two further articles:

  • Corporation tax for ATX-UK (P6)
  • Corporation tax – Groups and chargeable gains for ATX-UK (P6)


Written by a member of the ATX-UK (P6) examining team

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.