Group Relief in a Business formation UK and Tax Planning and Order of Group Relief

25 Oct

If you are thinking on how to register a company in UK, that forms groups with other companies, then there are some important terms that need to be pondered upon.

The availability of a group relief can be detected where a group comes into existence or is established with the help of the companies that reside anywhere around the globe.

The blog focuses and throws light on the provisions of group relief, defining a relief and a 75% group. It further brings into discussion, the losses that are eligible for relief and the corresponding periods of accounting, concluding with the claims, tax planning and the transfers within a group. In a nutshell, it answers the queries related to the formation of groups within the companies if someone comes up with an idea and question of how to register a company in UK.

Group Relief and its Provisions

Within a 75% group, the losses of trade in present period, the excessive losses in property business, and excessive charitable donations that qualify can be contained within the companies of UK. The matching of the profits and losses of the corresponding periods must be done.

The provisions of the group relief allow the companies within a 75% group to perform the transferring of losses of trade to other companies existent within the group, to set these against the total profits liable to tax and to reduce the overall liability of corporation tax of the group.

What is a 75% Group?

When you create a company UK, and it wishes to be the 75% subsidiary of another company, then the holding company should possess the following:

  • A right to at least 75% of the income that is distributable of the subsidiary
  • At least 75% of the share capital that is ordinary of the subsidiary
  • A right to at least 75% of the total subsidiary assets were it to be completed

Two companies are considered to be the members of a 75% group in the case when one company is a 75% subsidiary of the other or both the companies are 75% subsidiaries of a different third company.

The two companies are said to be in a 75% group only in the case of having an effective interest of 75%. Hence, an 80% subsidiary of one company T of an 80% subsidiary of another company S is not considered to be in a 75% group with a holding company, say H. This is due to the fact that the interest that holds effective is calculated to be 80% * 80% that equals 64%. However, it is important to note that both T and S are in a 75% group and are allowed to make a claim of group relief from one another. S cannot make a claim of group relief from T and pass it down to H, rather, it can only make a claim for a group relief for its own purposes and own utilization.

The offshore company formation UK or the companies that do not reside in UK can also be a part of the 75% group. However, as a general rule, the losses may only be contained between the companies that reside in the UK and not in the case of offshore company formation UK.

Broader Explanation of the Relief

A company whose of surrenders type, is allowed to surrender any amount of its loss of trade but a company that makes a claim is only allowed to make a claim of an amount up to the total profits liable to tax that are available. As a normal practice, the best way to go for the companies to make the surrendering of the losses to set against the total profits liable to tax of the company that suffers the highest rate of the marginal tax.

Transferring the Loss

Suppose you create a company UK, that is, of the surrendering type and it makes a loss, then it may transfer that loss to another member of the 75% group of the company that claims.

Rules for the Claimant Company

A claimant company, defined as the company that makes the claim, is a company that is expected to make use of its own losses for the present year or the losses that are brought forward in the working of the total profits liable to tax against which it may make a claim for the group relief, even if it does not actually make a claim for the relief of present losses against the total sum of profits.

Also, the group relief is said to be against the total profits liable to tax once all the other reliefs for the present period (such as qualifying charitable donations) or that are brought forward from the preceding periods.

It should be noted here that the group relief is provided prior to relief for any amounts that are carried back from the future periods.

Rules for the Surrendering Company

A surrendering company, also defined as the company that surrenders, may group relieve a loss of trade prior to setting it against its own net profits for the period of the loss, and may make a specification of an amount that requires surrendering.

It is important for the planning of tax since it allows the company that surrenders, to leave the total profits liable to tax in its own calculation that is to be paid by the corporation tax at the rate of small profits, while making a surrendering of its losses to other companies to fill the space for the profits that would otherwise be entered into the band of marginal relief or made liable to tax at the main rate. It should be kept in mind that the total profits liable to tax in the marginal relief band are subject to tax at the marginal rate of 23.75 percent.

Which Losses Are Eligible for Relief?

A company may make the choice of surrendering to the losses of trade to other group companies, excessive charitable donations that qualify and excessive losses in the income acquired from property. The charitable donations that qualify and the losses of property income can only be made subject to group relief to the limit that they are in abundance than the net profits prior to taking in consideration any losses of the present period or brought back or forward from the past or future accounting periods. The charitable donations that qualify and are in excess should be subject to surrendering before the excessive losses of property income.

It is important to note here that only the present period losses are present for the group relief.

Related Accounting Periods

The losses that are surrendered should be set against the net profits liable to tax of a relative accounting period. In the case of the accounting periods of the company that claims and the company that surrenders not being the same, then this leads to the decision of dividing of both the losses and the profits so that only the overlap period’s result may be set off. The apportioning or the division is based on time. However, when, in the period, the company leaves or joins a group, a substitute method may be made use of, if the result obtained from the division or apportionment on time basis will not be justified or reasonable.

If the claimant company makes a claim for the relief for losses that are surrendered by multiple companies, the net relief that can be claimed for an overlapping period is restrained to the proportion of the claimant’s net profits liable to tax that are attributable to that period. In a similar manner, if a company makes the surrendering of losses to multiple claimants, the net losses that can be surrendered in an overlapping period is restrained to the proportion of the losses of the company that surrenders attributable to that period.

Claims for Group Relief

A group relief is normally claimed on the tax return of the company that claims. It is not effective until and unless a consent notice is also provided by the company that surrenders.

The claims or the surrenders group wide can be made as one person may act for more than two companies at one time.

Any payment by the company that claims for group relief is ignored for all purposes of corporation tax up to the amount of loss that is surrendered.

Tax Planning and Order of Group Relief

The following order should be followed in order to give the group relief:

  • The relief is first given to companies in the marginal relief band that pay 23.75% tax for the financial year 2013 but only enough loss to bring the augmented profits down to the lower limit.
  • Then to companies that pay the main rate of tax at 23% for the financial year 2013.
  • Finally, to the companies that pay the small profits rate at 20% for the financial year of 2013.

In a similar manner, a company must claim to make use of a loss itself instead of surrendering the loss to other group companies if the claim against its own net profits will result into a saving of tax at a higher rate.

Companies with profits may take advantage by making a reduction in the claims for the capital allowances in a specific year. This may result in enough profits to take benefit of group relief that may only be available for the present or the ongoing year. The increment in the amount in which the allowances written down can be claimed in the coming years is made accordingly.

Group of Capital Gains

The capital gains group comprises of the top company and the additional companies in which the top company has an effective interest of 50%, meeting the condition that each level contains a holding of 75%. Within a group of capital gains, the transferring of assets is done at no loss or no gain, that is, the situation remains neutral.

The companies are said to be in a capital gains group in the case when:

  • There is a holding of 75% at every level
  • The top company has an effective interest in the group companies of over 50%

It must be remembered that as compared to the 75% group, in this case an effective rate of only 50% is the requirement. Also, a company can only be in a single capital gains group though it may be a part of multiple 75% groups.

Transfers within the Group

The companies that are in the capital gains group make transfers of chargeable assets within the group without the occurrence of an allowable loss or a chargeable gain. Since this relief is mandatory, then there is no requirement of any election. The assets are supposed to be transferred at a cost that will give no loss or no gain to the person who transfers. That is, cost with an additional indexation allowance up to the transferring date.

Losses and Gains of the Matching Group

The matching losses and gains can be done within a group. This can be achieved by the election of part or all of the gain or loss is considered as transferred between the group companies.

The capital gains group’s two members can choose to make the transfer of an allowable loss or a chargeable gain, or a portion of a loss or gain, between them. This choice must be made within two years of the termination of the accounting period in which the loss or gain is suffered by the company that makes the transfer.

It must be noted here that only the losses of the present year can be transferred, not the losses that are brought forward.

From the viewpoint of planning of tax, the elections should be made to match losses and gains in order to make sure that the total gains liable to tax that occur in the company are subject to the corporation tax’s lowest rate.

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