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Question 4b

Cairo Ltd runs a business promoting African music. The company’s taxable total profits for the year ended 31 March 2014 were £87,000.

Cairo Ltd has owned 100% of the ordinary share capital of Dakar Ltd since it began trading on 1 December 2012, running a music recording studio. Dakar Ltd’s results for the year ended 30 November 2013 and for the four-month period ended 31 March 2014 are as follows:

Year ended
30 November 2013
£
Period ended
31 March 2014
£
Trading loss (54,600) (27,900)
Capital loss 0 (16,200)
Qualifying charitable donations 0 (3,600)

For the year ended 31 March 2015, both Cairo Ltd and Dakar Ltd will pay corporation tax at the small profits rate of 20% on their trading profits.

Required:
(i) Advise Cairo Ltd as to the maximum amount of group relief which can be claimed against its taxable total profits of £87,000 for the year ended 31 March 2014.

Note: You are not expected to calculate Cairo Ltd’s corporation tax liability. (4 marks)

(ii) Explain why it is probably beneficial for Dakar Ltd to group relieve its losses to Cairo Ltd rather than offsetting them against its own profits. (2 marks)