This article is relevant to candidates sitting the TX-UK exam in the period 1 June 2021 to 31 March 2022, and is based on tax legislation as it applies to the tax year 2020-21 (Finance Act 2020).
The only relevance of having 51% group companies is in relation to the requirement for large companies to make quarterly instalment payments of their corporation tax liability.
A large company is basically one whose profits are more than £1,500,000, but this limit is divided by the number of 51% group companies.
For the year ended 31 March 2021, Largish Ltd has taxable total profits of £380,000. Largish Ltd has had three 51% group companies since 2018. The company had the same level of profits for the year ended 31 March 2020.
Largish Ltd will be required to make quarterly instalment payments in respect of its corporation tax liability because its profits of £380,000 exceed the profit limit of £375,000 (1,500,000/4).
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:
For the year ended 31 March 2021, Fruit Ltd has an unrelieved trading loss.
Group relief group
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.
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
For the year ended 31 March 2021, 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 2021 claimed group relief of £40,000 from this company.
The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2021 is:
|Qualifying charitable donations||(2,000)|
|Taxable total profits||500,000|
|Corporation tax at (500,000 at 19%)||95,000|
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 2021, Sofa Ltd had a trading loss of £200,000.
For the year ended 30 June 2020, Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2021 will have taxable total profits of £90,000.
Futon Ltd commenced trading on 1 January 2021, and for the three-month period ended 31 March 2021 had taxable total profits of £60,000.
Futon Ltd did not commence trading until 1 January 2021, 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 2021.
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 current year or brought forward losses which 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 2021 are:
|Property business income/(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
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.
Noo Ltd owns 100% of the ordinary share capital of Oon Ltd. Both companies commenced trading on 1 April 2019. The results of each company for the years ended 31 March 2020 and 2021 are:
Year ended 31 March 2019
Year ended 31 March 2020
|Property business income||4,600||5,200|
|Property business income/(loss)||(13,600)||1,700|
Year ended 31 March 2020
Year ended 31 March 2021
Because of the single rate of corporation tax of 19%, the rate of corporation tax is not a factor when it comes to the choice between loss reliefs or when considering group relief claims. The only relevant factors are 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.
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 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:
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to 31 March.
On 15 August 2020, Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20 February 2021, Stick Ltd sold a factory and this resulted in a capital loss of £35,000.
As at 1 April 2020, Stick Ltd had unused capital losses of £40,000.
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