TXF6 UK
Syllabus E. Corporation Tax Liabilities E5. Group corporate structure for C.T.

E5a. 75% loss group

Syllabus E5a)

Define a 75% group, and recognise the reliefs that are available to members of such a group
and
The use of such exemptions and reliefs is implicit within all of the above sections 1 to 5 of part E of the syllabus, concerning corporation tax.

A group of companies is like a family, they can share their losses and gains

There are 4 types of groups that you need to know:

A – Related 51% group companies

B – VAT groups 

C – 75% loss groups

D – 75% gains groups

We have already dealt with related 51% group companies and VAT groups.

75% loss groups

There are 2 conditions that need to be satisfied for a company to be a part of a 75% loss group. 

These are:

  1. The parent company must own (directly or indirectly) an effective interest of 75% of the ordinary share capital all member companies.

Illustration:

A Ltd. owns 90% of B Ltd. 

B Ltd. owns 90% of C. Ltd. 

Which companies are members of this 75% loss group?

Solution:

All 3 companies are members. 

This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect interest of 81% (90% * 90%) in C Ltd. 

Therefore, the parent effective interest is satisfied.

Illustration:

  • A Ltd. owns 100% of B Ltd. 

    B Ltd. owns 75% of C. Ltd. 

    C. Ltd. owns 100% of D Ltd. 

    Which companies are members of this 75% loss group?

Solution:

All 3 companies are members. 

This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect interest of 75% (100% * 75%) in C Ltd, and an indirect interest of 75%(100% * 75% * 100%) in D Ltd.

Therefore, the parent company condition is satisfied.

The effect of 75% loss groups

UK members of a 75% group can surrender losses to other UK members.

What losses can they surrender?

  1. Excess property losses. 

    This means that the property losses of the company who has generated the loss must relieve the loss against its own total income before surrendering it to a group member. 

    Thus, the loss making company’s total income should be NIL before it surrenders its property loss.

  2. Excess qualifying charitable donations. 

    This means that the qualifying donations of the company who has generated the loss must relieve the loss against its own total income before surrendering it to a group member. 

    Thus, the loss making company’s total income should be NIL before it surrenders its qualifying donation.

  3. Trading losses. 

    This means that the trading losses of the company who generated them must NOT relieve the loss against its total income or previous year’s income before surrendering it to a group member. 

    Thus, the loss making company’s total income does not need to be NIL before it surrenders its trading loss. 

    This trading loss cannot be carried forward or backwards against group members income, it can only be relieved in the corresponding period.

  4. Non-trading loan relationship deficits

    A deficit arises on non-trade relationships when the non-trade interest expenses is greater than the non-trade interest income.

    This deficit can be surrendered to group companies. 

    It does not have to be set against the surrendering companies total income first.

Conditions for loss relief

The loss relieved must be the lower off:

  1. The loss of the surrendering company for the exact same period against which it is being surrendered.

  2. The profit of the claimant company for the exact same period against which it is being claimed.

These periods are called “co-terminus periods”.

You will be able to understand this better with an illustration.

Illustration:

Ilea Ltd. made a loss for the year ending 31/03/19 of (£180,000).

  • William Ltd. joined the group on 01/01/2019 and made a profit of £100,000 for the year ending 31/03/2019.

  • Jane Ltd. had been a part of the group for many years and made a profit of
    £55,000 for the year ending 30/06/2019.

  • How much loss relief can be obtained?

Solution:

Loss relieved against William Ltd.

  • Only 3 months are co-terminus since William Ltd. joined the group (01/01/19-31/03/19)

Therefore the lower of:

William: 3/12 * £100,000 = £25,000

Ilea: 3/12 * £180,000 = £45,000

  • £25,000 loss can be relieved against William Ltd. profits. 

    Loss relieved against Jane Ltd.

    Only 9 months are co-terminus as both companies have a different year end (01/07/18-31/03/19)

Therefore the lower of:

Jane: 9/12 * 55,000 = £41,250

Ilea: 9/12 * £180,000 = £135,000

£41,250 loss can be relieved against Jane Ltd. profits.

Loss memo:
18/19 trading loss  (£180,000)
Relief against William Ltd.  £25,000
Relief against Jane Ltd. £41,250
Loss to be carried forward against Ilea/group future trading profits  £113,750

Illustration:

A Ltd. and B Ltd. are part of a 75% loss group. They both have 31/03 year endings.

  • A Ltd. makes a trading loss of (£190,000). B. Ltd makes a profit of £180,000.

  • How much of A Ltd.’s loss can be relieved?

Solution:

The lower of £190,000 and £180,000, therefore only £180,000 loss can be relieved and the remaining will be carried forward against A Ltd.’s future trading profits

Carried forward group relief

Carried forward group relief from 1 April 2017.

A company which has a post 1 April 2017 loss carried forward may transfer all or part of that loss to a member of the 75% group. 

Losses that can be surrendered:

  1. Carried forward trading loss

  2. Carried forward property loss

  3. Carried forward non-trading loan relationship deficit

  4. Carried forward management expenses

  5. Carried forward non-trading losses on intangible fixed assets

Unlike current period group relief, the surrendering company can only surrender a carried forward loss if it cannot use it itself.

When calculating available taxable profits which to use the carried forward loss relief, the claimant company must deduct its own losses first.

Note - if a company joins the group and already has carried forward losses, it cannot surrender these losses to other group companies.

Illustration

Apple Plc has one 75% subsidiary, Banana Ltd. 

Their results for the year ended 31 March 2019 are as follows:

Apple Plc £ Banana Ltd £
Trading profit 70,000 40,000
Trading losses carried forward from 31 March 2018 (5,000) (110,000)
Non-trade loan relationship income 10,000 10,000
Chargeable gain 12,000 6,000

Calculate the maximum carry forward relief that Apple Plc can claim from Banana Ltd.

Solution

Banana Ltd can only surrender the amount of carried forward loss that it cannot use itself, even if it would not choose to use the loss itself.

  • Carried forward trading loss £110,000
    Trading profit (£40,000)
    NTLR Income (£10,000)
    C. Gain (£6,000)
    Loss available for carry forward group relief £54,000

  • Apple Plc can only claim a loss against profits after deducting it's own losses first:

    Trading income £70,000
    NTLR Income £10,000
    C. Gain £12,000
    Carried forward trading loss (£5,000)
    Available taxable total profits £87,000

    Maximum carry forward group relief that Apple Plc can claim from Banana Ltd is therefore £54,000 (The lower of £54,000 and £87,000)

    Note - you will not be tested on group relief involving carried forward losses made prior to 1 April 2017.