Out-Law Guide | 10 Jan 2023 | 5:26 pm | 6 min. read
This guide sets out the basic rules for transferring corporation tax losses between companies which are part of a group ("group companies").
The guide only looks at income losses such as trading losses. It does not look at capital losses, which are subject to different rules.
The basic principle is that each company is a separate taxable entity for UK tax purposes, required to complete returns and account for tax to HMRC. However, special rules mean that some transactions between group companies are ignored for tax purposes and, for some tax purposes, groups can be treated as if they were one entity. For example:
Group relationships can be established in relation to a variety of different taxes. Each tax has a different definition of what a group of companies means for its purposes.
Group relief is an important and useful relief for groups of companies, and this guide looks in more detail at the mechanics of the relief and the tests that need to be satisfied for the relief to operate.
A company – known as the 'surrendering company' – which makes a corporation tax loss can surrender particular types of loss to another company in the same group of companies as itself. The company to whom the loss is surrendered – known as the 'claimant company' – can use the loss surrendered to it to reduce its liability to corporation tax.
It is usually the case, although not a requirement of the statutory rules, that the claimant company will pay the surrendering company for the loss received up to an amount of the tax saved. Assuming a UK corporation tax rate of 20%, the claimant company will pay the surrendering company 20% of the losses surrendered. Any such payment is ignored for tax purposes, so it will not be taxable as income earned by the surrendering company or deductible as an expense against profits for the claimant company.
From the surrendering company's perspective, a surrender of group relief transforms a loss that it would otherwise have to carry forward and use in later years into an immediate cash sum. From the claimant company's perspective the transaction is economically neutral - the group relief cancels out its corporation tax bill, so it effectively pays the tax it would have paid to HMRC to its fellow group member.
In the 2016 Budget, the government announced that from 1 April 2017, new rules will be introduced allowing the surrendering company's losses to be used by more than one company, and against more than one type of income.
In the 2016 Budget it was also announced that from 1 April 2017, companies with profits in excess of £5 million will only be to offset 50% of their profits against losses carried forward. The £5 million profit ceiling will apply per group and not per surrendering company.
The detailed rules are complex, but essentially the surrendering company and claimant company must both be UK based - either by being resident in the UK, or by carrying on a trade through a permanent establishment in the UK. In limited circumstances non-UK resident companies based in, or carrying on a trade in, a European Economic Area territory can surrender group relief to a UK company.
The surrendering company and the claimant company must also be part of the same group of companies. Broadly, the grouping requirement for this relief means that one company must be the beneficial owner of 75% or more of the other company's ordinary share capital, or else a third company must be the beneficial owner of 75% or more of both company's ordinary share capital. This percentage can be achieved through direct or indirect ownership.
There are additional group tests, designed to test true economic ownership of the company, which look at the rights of all equity holders. Equity holders are shareholders or loan creditors other than holders of fixed-rate preference shares and lenders who have made 'normal commercial loans'. These tests are complex, and need careful consideration where any shares are held by or loans are made by a third party or where any sort of option arrangement exists in relation to any shares in the company.
Losses can be surrendered in any direction – from parent to subsidiary company, subsidiary to parent company or sister to sister company – if the companies satisfy these tests.
Only particular types of income loss are available for group relief, the most important being trading losses, excess interest charges and management expenses.
The maximum amount of group relief that can be surrendered is the lower of the available loss in the surrendering company or the available profit in the claimant company. The amount surrendered cannot create a loss in the claimant company – the surrendering company can only surrender enough group relief to the claimant company to extinguish its tax bill.
Companies in a group tend to have the same accounting periods, and so the relief can easily be applied to the appropriate amount of profit in the claimant company. Special rules exist where the companies do not have the same accounting periods to allow group relief on a time-apportioned basis.
The claimant company claims group relief on its company tax return. Claims can usually be made up to two years after the end of the accounting period.
The claim must specify and quantify the amount of relief being claimed, and must specify which company is the surrendering company. The amount claimed can be less than the amount available for surrender, but if the amount claimed is stated to be more than the available amount then the claim will be ineffective.
The surrendering company has to give notice of consent in writing at, or before, the time the claim is made.
Group relief is denied in relation to a company if, at the time when the losses arise, arrangements exist by virtue of which the company could become a member of another group - such as on a sale of the company – or could become controlled by different people.
If a surrendering company has generated the losses through an artificial tax deduction scheme – for example, through loans taken out for an unallowable tax avoidance purpose – HMRC may deny their deductibility. In this case, the surrendering company has tried to surrender losses that do not actually exist and the tax return and group relief notices will have to be amended.
Group relief may also be available where the surrendering company is owned by a consortium, the claimant company is also a member of the consortium and both the companies are UK based. Again, detailed conditions must be satisfied in order for the relief to be available.
Broadly, there is a consortium where 75% of the surrendering company's shares are held by other companies. Those other companies are also members of the consortium if they own over 5% of the surrendering company. A consortium would typically arise where two or more companies set up a joint venture company (JVC).
Where a consortium exists: