COURSE: ACCA – TAXATION (TX)

Lecture Topic: Corporation Tax – Groups

1. Introduction

Companies in a group are separate entities with their own tax liabilities, but because of the close relationship between group
companies, tax law makes provisions for companies within a group to transfer losses to other group companies.

The main types of group relationships for tax purposes are:

(i) 75% subsidiaries (75% groups)

(ii) Capital gains groups

2. Group Relief for 75 % Groups

 Group loss relief is available to members of a 75 % group.

This enables companies within the group to transfer certain losses to other companies within the group, in order to
set these against taxable profits and reduce the group’s overall corporation tax liability.

 Two companies are members of a 75% group where:

(a) One company is the 75% subsidiary of the other; or

(b) Both companies are 75% subsidiaries of a third company, or

(c) Where there is a sub-subsidiary, that sub-subsidiary company and the ultimate parent company will only be in a
75% group if there is a 75% effective interest.

 For one company to be a 75% subsidiary of another, the holding company must have:

o At least 75% of the ordinary share capital of the subsidiary; and

o The right to receive at least 75% of the distributable profits and
o The right to receive at least 75% of the net assets on a winding up.

 A 75% group may include non-UK resident companies. However, losses may generally only be surrendered between
UK resident companies.

 The claim for group relief is normally made by the claimant company; the consent of the surrendering company is
required.

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2.1 Current period group relief

The surrendering company

 The surrendering company is the company that surrenders its loss.

 The surrendering company may specify any amount of its loss to be surrendered.

 The surrendering company may group relieve a current period trading loss before setting it against its own profits for
the period of the loss.

 The losses which may be surrendered are:

(i) trading losses

(ii) unused (excess) property business losses
(iii) unused (excess) qualifying charitable donations

Note 1: Qualifying charitable donations and property business losses can only be group relieved to the extent that they
exceed total profits before taking account of any losses of the current period or brought forward or back from other
accounting periods. Excess qualifying charitable donations must be surrendered before excess property income losses.

The claimant company

 The claimant company is the company to which the loss is surrendered.

 The loss is set off against the Taxable Total Profits of the claimant company.

 The Taxable Total Profits against which group relief may be claimed must be calculated as though any current year
losses and losses brought forward of the claimant company are relieved first, even if it does not in fact claim relief for
current period losses.

 Group relief is against profits after all other reliefs for the current period or brought forward from earlier periods
including qualifying charitable donations.

 Current period group relief is given before relief for any amounts carried back from later periods and group relief for
carried forward losses.

2.2 Carry forward group relief

 Carry forward trading losses and property business losses can also be grouped relieved.

 The surrendering company can only surrender carried forward losses that it cannot deduct from its own total profits
for that period.

 The claimant company must use its own losses to the fullest extent possible in working out the available taxable total
profits against which it may claim carry forward group relief.

2.3 Corresponding accounting periods

 Surrendered losses must be set against the taxable total profits of a corresponding accounting period.

 If the accounting periods of the claimant company and the surrendering company are not the same, both profits and
losses must be time apportioned so that only the profits/losses of the period of overlap may be set off.

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3. Capital Gains Groups

 Companies are in a capital gains group if:

(a) At each level in the group structure, there is a 75% shareholding, and
(b) The top company has an effective interest of at least 50% in each subsidiary (and sub-subsidiary) company.

 A company can only be in one capital gains group.

 There are three (3) reliefs available to companies within a capital gains group:

1. Transfer of assets within a group

Where one group company transfers (or disposes of) an asset to another group company they do so without a
chargeable gain or allowable loss arising. The assets are deemed to be transferred at such a price as will give the
transferor no gain and no loss.

The no gain/ no loss is calculated by using a Deemed Disposal Consideration that is the sum of:

(a) The Incidental Costs of Disposal

(b) The Allowable Costs
(c) The Indexation Allowance (if any)

This relief is compulsory, and no claim is needed.

2. Matching groups gains and losses

Two members of a capital gains group can elect to transfer a chargeable gain or capital loss, or any part of a gain
or loss, between them.

The benefit of this is that the set off of capital losses and chargeable gains can be done even if the disposals were
done by different companies.

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.

3. Rollover relief

A gain on a disposal by one group company can be rolled over against a qualifying re-investment made by
another group company.

Both the disposing company and the acquiring company must make the claim.

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Questions

1.
For the year ended 31 March 2022, 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 2022 claimed group relief of £40,000 from
this company.

Calculate Ballpoint Ltd.’s corporation tax liability for the year ended 31 March 2022.

2.
Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the year ended 31 March 2020
are:

Lae Ltd. Mon Ltd.

£ £
Trading Loss (18,100) (11,200)
Property Business Profit / (Loss) (26,700) 60,900
Interest Income 1,600 3,300
Capital Loss (19,200) 0
Qualifying Charitable Donations (4,800) (3,200)

What are the Group Loss Relief Implications for both companies?

3.
XYZ Ltd owns 100% of the ordinary shares in ABC Ltd.

ABC Ltd incurs a trading loss for the year to 31 August 2012 of £144,000.

XYZ Ltd has Taxable Total Profits for the year to 31 December 2012 of £120,000.

What group relief can XYZ Ltd claim from ABC Ltd for the year ended 31 December 2012?

4.
Mice Ltd owns 100% of the ordinary share capital of Web-Cam Ltd. Web-Cam Ltd is expected to make a trading profit of
£224,000 for the year ended 30 June 2012. Web-Cam Ltd has no other taxable profits or allowable losses.

Mice Ltd incurred a trading loss of £180,000 for the year ended 31 March 2012.

Required

Advise Web-Cam Ltd as to the maximum amount of group relief that can be claimed from Mice Ltd in respect of the trading
loss of £180,000 for the year ended 31 March 2012.

5.
Green Ltd acquired an asset on 1 April 2011 for £100,000. The asset is sold to Jade Ltd, a 100% subsidiary on 1 October 2019
for £120,000, when the asset was worth £180,000. Legal fees of £2,000 were incurred on the disposal.

The indexation factor from April 2011 to December 2017 is 0.872.

Calculate any chargeable gain arising on the disposal of the asset.