TaxationWeb by Simon Groom
Simon Groom of LexisNexis Tolley covers the basics of group relief, group gains and VAT.Group relief
Group relief allows losses to be transferred to profit making companies in the same 75% group. The maximum claim is the lower of the available loss or the available profit.For group relief to apply, one company must own at least 75% of the other. Group relief also applies between two companies that are each 75% owned by the same parent company.
A Ltd
/ \
75% 75%
B Ltd C Ltd
Losses can be transferred between A Ltd, B Ltd and C Ltd in any way the group decides.
Consider the following group;
Tolley Ltd
/ | | \
100% 80% 60% 25%
A Ltd B Ltd C Ltd D Ltd
Tolley Ltd owns at least 75% of A Ltd and B Ltd, so trading losses can be freely transferred between these three companies. There is no 75% relationship with C Ltd or D Ltd, so group relief does not apply.
Note here that Tolley and C Ltd are associated as there is a 51% relationship between them, but no group relief claims are possible.
Corporate ownership must apply for group relief. If the group is controlled by Mr Tolley (an individual) rather than Tolley Ltd, group relief would not be available.
“Sub-subsidiaries”
When looking at group relief, the 75% definition applies both directly and indirectly. This is important when looking at sub-subsidiaries.
A Ltd
|
| 90%
|
B Ltd
|
| 90%
|
C Ltd
|
| 90%
|
D Ltd
A Ltd owns 90% of B Ltd. Losses of A Ltd can be transferred to B Ltd.
A Ltd owns 81% of C Ltd (90% of 90%). Losses of A Ltd can be transferred C Ltd.
However, A Ltd only owns 72.9% of D (90% of 81%). This is below 75%, so losses of A Ltd cannot be transferred to D Ltd (and vice versa).
Losses available for group relief
The surrendering company (the loss making company) may surrender:(i) DI losses (trading losses)
(ii) DIII losses (deficits on non-trading loan relationships)
Losses may be surrendered before the surrendering company offsets losses in its own computation.
The surrendering company may also surrender;
(iii) excess charges (eg, Gift Aid payments)
(iv) excess management expenses
(v) excess Schedule A losses
(vi) excess losses on Intangible Fixed Assets.
Optimum use of losses
When using losses, it is important to obtain relief at the highest marginal rates of tax and use losses sooner rather than later.From a timing perspective, preference is for claims in the following order:
(i) current year then carry back;
(ii) group relief;
(iii) carry forward.
The primary objective is to maximise tax savings for the group. We therefore consider the marginal rates of tax of all companies in the group.
Marginal rates
For financial years up to and including FY 2005, the rates of tax within the “marginal” bands are 23.75% and 32.75%. The marginal rates will change for FY 2006 as the 0% starting band has been removed.Diagramatically, these are illustrated below:
_______________
| |
| 30% |
| |
£1,500,000* -------------------
| |
| 32.75% |
| |
£300,000* -------------------
| |
| 19% |
| |
£50,000* -------------------
| |
| 23.75% |
| |
£10,000* -------------------
| | |
| | 0% |
v |_____________|
* Divided by number of associated companies
Therefore, if a company has profits between the upper and small companies limits (between £300,000 and £1,500,000), and it received an extra £1 of income, it would pay corporation tax at 32.75% on that “marginal” £1.
When making group relief claims, we aim to eliminate profits taxed at the highest marginal rate (32.75%).
To achieve this, we specify the amount of group relief required to bring profits down to the small
companies’ threshold. This ensures that losses are relieved at an effective rate of 32.75%.
We then start eroding profits taxed at 30%, then profits taxed at 23.75%, again specifying the claim to reduce profits to the starting rate threshold and no further. Next we erode profits taxed at 19%. We avoid eliminating profit taxed at 0%
Illustration 1
Lexis Ltd has 2 wholly owned subsidiaries, Groom Ltd and Jones Ltd. The results for the Lexis group in the year ending 31 March 2006 are as follows:
Lexis Ltd Groom Ltd Jones Ltd
£ £ £
DI profits 570,000 (40,000) (20,000)
DIII interest 30,000 105,000 6,000
To calculate the optimum loss relief, we carry out the following steps.
First calculate the tax limits (3 associated companies):
£1.5M / 3 = £500,000 £50,000 / 3 = £16,667
£300,000 / 3 = £100,000 £10,000 / 3 = £3,333
Next, build-up corporation tax computations to identify marginal tax rates.
Lexis Ltd Groom Ltd Jones Ltd
£ £ £
DI 570,000 Nil Nil
DIII 30,000 105,000 6,000
________ ________ _______
Profit
600,000 105,000 6,000
________ ________ _______
Marginal rates 30% 32.75% 23.75%
We want to save tax at the highest marginal rate.
Groom Ltd has losses of £40,000. The optimum claim is to use £5,000 of losses to reduce Groom Ltd’s profits to the lower limit of £100,000. We next surrender the balance of the loss to Lexis Ltd by group relief. As we cannot specify the amount to offset under a current year claim, the group relief claim of £35,000 is made first before submitting an “all-or-nothing” current year claim for the balance.
Jones Ltd has a loss of £20,000. Best use of this loss will be in Lexis Ltd by group relief.
Lexis Ltd Groom Ltd Jones Ltd
£ £ £
DI 570,000 Nil Nil
DIII 30,000 105,000 6,000
________ ________ _______
Profit
600,000 105,000 6,000
Current year claim (5,000)
Group relief: Groom Ltd (35,000)
Jones Ltd (20,000)
________ ________ _______
PCTCT £545,000 100,000 6,000
________ ________ _______
Time apportionment
Where group companies have different accounting periods, losses and profits must be time-apportioned to determine how many losses can be group relieved. Time-apportionment also applies where either company has a short accounting period.If a company joins or leaves a group part way through an accounting period, time-apportionment applies.
Only losses made while the surrendering and claimant company are part of the same group can be group relieved.
Capital Gains Groups
Companies are in the same capital gains group when one company owns at least 75% of another company, or two companies are 75% owned by the same parent company.The group gains regime has slightly different rules to group relief for sub-subsidiaries. For group gains, the direct relationship must be at least 75% but the indirect relationship (when multiplying down) need only be above 50%.
For group gains purposes, a company can only be a member of one group.
Transfers between members of the same group automatically take place at “no gain no loss”.
Illustration 2
In the Lexis group, Jones Ltd purchased a building for £500,000 in 1992. In August 2006, Jones Ltd transferred the building to Groom Ltd. Groom Ltd and Jones Ltd are in a gains group, so the transfer takes place at “no gain no loss”. Indexation between 1992 and 2006 is assumed to be 50%. The gains computation is;
£
Deemed Proceeds 750,000
Cost (500,000)
Indexation (50%) (250,000)
_________
Gain NIL
_________
Groom Ltd is deemed to acquire the building for £750,000 in August 2006. This is relevant in the event of a future disposal by Groom Ltd.
Notional transfers
A notional transfer is where we pretend that an asset (or part of it) has been transferred within the group prior to sale. This enables us to utilise capital losses and ensure that gains are taxed at the lowest possible marginal rate.Notional transfer claims can only be made by members of the same gains group. A joint election is required within two years of the end of the accounting period of the company selling the asset.
Illustration 3
For the year ended 31 March 2007, estimated profits of Jones Ltd are £20,000 and of Lexis Ltd are £480,000. Jones Ltd has capital losses brought forward of £12,000. In February 2007, Lexis Ltd sold a property realising a gain of £40,000.The upper and lower limits are as before.
If the gain is taxed in Lexis Ltd, it increases tax liabilities by:
£(20,000 x 32.75%) + £(20,000 x 30%) = £12,550
If the asset is notionally transferred to Jones Ltd prior to sale (triggering the gain in Jones Ltd), the position is improved as Jones Ltd has capacity in the 19% band and also has capital losses brought forward.
£
Gain in Jones Ltd 40,000
Capital losses b/f (12,000)
__________
Taxable gains 28,000
__________
The tax liability on the gain is: £28,000 x 19% = £5,320
Electing for the notional transfer saves tax of £7,230 for the group.
Roll-over relief
A capital gains group is treated as one unit for rollover relief purposes. Gains made by one group company on trading assets can therefore be rolled-over against the base cost of qualifying assets purchased by other group companies.De-grouping charges
A “de-grouping” (or “exit”) charge arises if a company leaves the group within 6 years of an intra-group transfer, still owning the asset. The charge arises in the departing company as though the asset had been sold by the departing company for its market value at the date of the original “no-gain-no-loss” transfer. The gain is taxed in the period the company leaves the group.A joint election may be made to transfer the de-grouping charge to another group member.
VAT Groups
A company is a single taxable person for VAT and has its own VAT registration. However a group of companies may apply to Customs to be treated as a single, taxable person under a “group registration”.To be eligible for group registration, companies must meet certain conditions:
1. They must have an established place of business in the UK;
2. They must be under “common control” - ie, one controls the other or the same person (an individual or company) controls all the companies. “Control” broadly means owning more than 50% of the shares.
A group registration can be amended at any time.
Returning to the Lexis group. To decide which companies can be included in a VAT group registration, consider “common control” first. Lexis Ltd controls Groom Ltd and Jones Ltd, so all companies can join the VAT group.
The main effects of VAT registration are:
1. Supplies between the companies within the VAT group are disregarded for VAT purposes. Hence when looking at VAT payment or recovery, supplies between group members are ignored.
2. Supplies to or from outside of the group are treated as made by the group’s “representative member”. The “representative member” files one VAT return including the output tax and input tax for the whole group. This offers simpler VAT accounting.
3. Even though the group nominates one company as its representative member, there is “joint and several liability” for VAT for the whole group. Therefore if one company defaults or becomes insolvent, the rest of the group are liable for its share of the VAT liability.
There is free choice of which companies are included in the group registration. It is possible to include certain companies or leave eligible companies out. Because of this, an exempt company can be included in a VAT group. Companies making exempt supplies cannot register for VAT. However including an exempt company in a VAT group, effectively registers that company for VAT.
The downside of including an exempt company in a VAT grouping is that the group becomes partially exempt for VAT purposes. However, at least some of the input tax incurred by the exempt company will be roverable.
Also be aware that large groups (with large turnovers) are more likely to exceed the £2 million monthly payments threshold. Accordingly the group may be liable to make monthly payments of VAT instead of the usual quarterly payments.
Simon Groom
June 2006
Simon Groom is Head of Tax Training at LexisNexis Tolley where he writes and teaches for the ATT & CTA examinations. He can be contacted via the Tolley Tax Training website at www.tolleytraining.co.uk.
"LexisNexis Tolley® Tax Training" provides quality correspondence, classroom and e-training for the ATT, CTA, AIIT and ADIT examinations. In addition their e-learning package "Tolley’s Tax Tutor" is excellent preparation for anyone studying tax for any professional examination (ACCA, ICAEW, ICAS, AAT etc). For further information please click the following link: www.tolleytraining.co.uk or email your query to taxtraining@lexisnexis.co.uk
Please register or log in to add comments.
There are not comments added