View the related Tax Guidance about Group relief
Group relief
Group reliefGroup relief allows losses to be surrendered from loss-making companies to profitable companies in the same 75% group. The maximum claim is the lower of either:•the available loss•the available profitIn addition, there are rules allowing the allocation of capital gains and losses to other group members. The definition of a ‘group’ is slightly different for group gains purposes. For information on this, see the Group gains guidance note.The video entitled The principles of group relief also explains the 75% group definition, as well as providing further information on group relief of current year and carried forward losses. It covers some of the considerations to be made in allocating losses in a tax efficient manner and walks through illustrative examples to show how the calculations are performed.The Group relief ― further aspects video explores non-coterminous and short accounting periods, companies joining or leaving a group, plus issues relating to non-resident subsidiaries and overseas permanent establishments.Reforms to corporation tax loss reliefReforms to corporation tax loss relief were introduced in 2017. The changes introduced more flexibility for the utilisation of losses carried forward and also the ability to group relieve carried-forward losses. In addition, a restriction was introduced such that only 50% of profits in excess of £5 million can be offset by losses brought forward.For accounting periods beginning on or after 1 April 2017, or straddling 1 April 2017, the additional relaxation allowing group relief for carried-forward losses and the related 50% restriction to that relief are dealt
Group relief for carried-forward losses
Group relief for carried-forward lossesThis guidance note examines in detail the relief available to groups for carried-forward losses. The scope excludes the treatment of specialist businesses such as banks, insurance companies and oil and gas companies.From 1 April 2017, companies can surrender certain types of carried-forward losses to another company in the same group relief group. The rules are subject to several conditions and numerous anti-avoidance provisions, which are discussed below.Prior to 1 April 2017, it was not possible to surrender brought forward losses of any description against profits of any other companies within the group relief group. This meant that certain types of losses could be ‘trapped’ within individual legal entities with little or no prospect of relief, particularly in cases where the company was not expected to make profits in the future against which the losses could be relieved.Development of the UK legislationThe legislation was introduced by F(No 2)A 2017, Sch 4, para 23 and applies generally from 1 April 2017. For the anti-avoidance rules, see below.Draft guidance on the loss relief commencement provisions was issued by HMRC on 7 December 2017.More detailed HMRC guidance on group relief for carried forward losses can be found at CTM82000 onwards.Accounting periods straddling 1 April 2017Where a company’s accounting period straddles 1 April 2017, the periods before and after 1 April 2017 are treated as two separate accounting periods. Profits / losses are time apportioned or, where that would produce an unreasonable result, apportioned on a just and reasonable basis.
Concluding the compliance check
Concluding the compliance checkNote that this guidance note uses the term compliance check in line with HMRC’s current terminology. However, the term ‘enquiry’ is still used in the legislation referenced.HMRC will close a compliance check into a tax return once it has successfully addressed the perceived risks (with or without the agreement of the taxpayer / adviser). These risks will normally have been identified before the check began and as the check progresses. HMRC and taxpayers may resolve and close individual aspects by way of a partial closure notice (PCN), whilst leaving other matters open. When all issues are resolved, a final closure notice is issued.HMRC may have found nothing wrong with the tax position being checked or may have found an inaccuracy. During the check HMRC should normally have asked for interim payments of late paid tax and Class 4 national insurance contributions if applicable and considered the position regarding interest and penalties.If the check is closed without any inaccuracy being identified, HMRC must send a final notice to the taxpayer that the check is complete. If the compliance check has been carried out on the telephone, the HMRC officer should confirm closure as part of the call. It is good practice to ask for confirmation of this in writing and HMRC should always write to a taxpayer or adviser if requested. However, a formal check should only be concluded via a closure notice, contract settlement or settlement deed.Where an inaccuracy has been identified, checks to self assessment
Restriction on non-trading losses on change in ownership
Restriction on non-trading losses on change in ownershipThis guidance note provides details of the potential restriction that may arise in respect of certain losses on a change in ownership of a company with investment business. The restrictions are very similar to those which apply in respect of trading losses. See the Trading losses and anti-avoidance guidance note for more information.There are various conditions relating to the change in ownership of an investment company which, if met, will result in potential restrictions to the excess management expenses, qualifying charitable donations and non-trading losses that have arisen prior to the change. The purpose of this legislation is to ensure that companies are not ‘traded’ just so a tax advantage can be obtained, such as accessing a company’s tax losses. Please refer to the following guidance notes for general details about the utilisation of these types of losses:•Excess management expenses•Non-trading deficits on loan relationships•Losses on non-trade intangibles•Property business losses for companiesThe conditions which lead to the potential restrictions under the rules in CTA 2010, Pt 14, Ch 3 (CTA 2010, ss 677–691) are that there is a change in ownership (see below) of a company with an investment business and one of the following applies:A)after the change in ownership there is a significant increase in the amount of the company’s capital (discussed in more detail below)B)within the eight-year period beginning three years before the change in ownership there is a major change in the nature or
Foreign profits ― loss relief
Foreign profits ― loss reliefThe treatment of losses of UK companies from foreign operations depends on the nature and extent of the foreign operations.Trade carried on wholly overseasLosses of a UK company from a trade carried on wholly overseas by that company cannot be set against any profits from other sources, including other overseas businesses. The losses can only be carried forward and set against future profits of the same trade. This rule was not relaxed by the changes in the utilisation of losses carried forward arising from 1 April 2017 which apply for UK trading losses. These amendments allow other trade losses carried forward to be offset against future profits or surrendered as group relief. For details of the rules on carried-forward trade losses from 1 April 2017, see the Trading losses carried forward and Group relief for carried-forward losses guidance notes. The carried-forward loss relief changes also introduced a restriction such that only 50% of profits in excess of £5m can be offset by losses brought forward. This
Setting up overseas ― branch or subsidiary
Setting up overseas ― branch or subsidiaryAlthough a UK company can do a reasonable amount of business in another country without a taxable presence in that country, eventually the company may need to consider whether to establish a more formal presence in such a country, generally by way of a branch or subsidiary.The decision will often usually depend on commercial factors, particularly where there are regulatory requirements which demand, for example, a particular level of capital which is more easily satisfied through a branch structure where the parent company capital is taken into account.Where there is no particular commercial pressure for one legal form over another, tax issues may influence the decision by taking into account the local country’s tax position for branches and subsidiaries. For example, the parent company should consider:•is there any difference in tax rates between a branch and a subsidiary?•can profits be remitted back from the country to the UK in the same way? For example, the US has a branch profits withholding tax which is reduced to 5% in the UK / US tax treaty, but dividends paid from a US subsidiary to a UK parent company owning more than 80% of the share capital in the subsidiary for more than a year before the dividend is paid would not suffer any US withholding tax on the profits distributed by the subsidiary (see DT19867A)•can start-up losses in the entity be easily relieved against group profits?It is important to consider the classification
Excess management expenses
Excess management expensesThe common types of allowable and unallowable management expenses for corporation tax purposes are set out in the Management expenses guidance note. Allowable management expenses are set against total taxable profits in the accounting period in which they are incurred. This set off is automatic (and compulsory) and is against total profits before deducting qualifying charitable donations and before any other loss relief claim. Excess management expenses arise to the extent that the management expenses in an accounting period exceed the total profits for that period. Where excess management expenses arise, they can either be:•carried forward and offset against future total profits, or•surrendered to another group company. This applies to excess management expenses carried forward from earlier periods provided they arose on or after 1 April 2017Excess management expenses cannot be carried back to an earlier period. This guidance note provides details on the relief available for excess management expenses. For more general information on these expenses, please refer to the Management expenses guidance note.There are various anti-avoidance provisions which can restrict the use of managements expenses. These are also briefly discussed below. Carried-forward excess management expensesWhere a company’s management expenses in an accounting period exceed the total profits for that period, the excess management expenses can be carried forward and offset against future total profits. Any qualifying charitable donations which are paid during the accounting
Video games tax relief ― key provisions
Video games tax relief ― key provisionsOverview of VGTRVideo games tax relief (VGTR) is available for accounting periods commencing prior to 1 January 2024 on which date the revised relief for video games known as the video games expenditure credit (VGEC) became available, see the Video game expenditure credit (VGEC) ― key provisions guidance note. The video game tax relief detailed below is still available for new productions up to 31 March 2025 and continuing productions up to 31 March 2027 but from 1 April 2027 these tax reliefs will cease. VGEC also changes the requirement on European expenditure below to a UK expenditure requirement with a lower threshold of 10%.Companies which carry out the development of video games may obtain an additional deduction for corporation tax purposes. The deduction is based on the company’s qualifying UK or EEA core expenditure (referred to as ‘European expenditure’ in the legislation), up to a maximum of 80% of these costs. If the deduction results in, or increases a loss, a payable tax credit is available, which is equal to 25% of the losses surrendered.To qualify for this relief, a video game development company (VGDC) must undertake work on the design, production and testing of a qualifying video game. A ‘video game’ itself is not defined in the legislation and so HMRC’s guidance follows the common meaning ― that a video game is an electronic game that is played through a video device and comprises the software and other electronically stored content
Entity classification
Entity classificationImplications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:•Tax treatment of partnerships and partnership types•Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see ‘Classification of return from a foreign entity’ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.See the following guidance notes:•Introduction to CFCs•Shareholder issues ― international corporate structuresIt may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:•the availability of business asset disposal relief (previously known as
Transactions in UK land
Transactions in UK landThe rules on taxing the profits of dealing in and developing UK land introduced by FA 2016 replace the previous legislation on transactions in land. The rules are widely drafted and catch all persons undertaking transactions in UK land and property, whether resident in the UK or resident outside the UK. The rules apply to profits recognised in the accounts on or after 8 March 2017, regardless of the date of the contract, ie even if the contract was entered into prior to 5 July 2016 (the date upon which the legislation came into force).This guidance note covers the latest rules as they apply for corporation tax purposes. The pre-2016 rules for corporation tax are covered in Simon’s Taxes at B5.235 onwards.Similar provisions apply for income tax as explained in the Transactions in UK land ― individuals guidance note. HMRC has confirmed that it is not the purpose of the rules to alter the treatment of the activity if it is clearly investment. Transactions such as buying or repairing a property to generate rental income and to enjoy capital appreciation are not likely to be treated as trading activity under the transactions in UK land provisions. Introduction to the current regimeEven with the rate of corporation tax being the same on income and gains, the relevance of these rules is:•foreign companies, or their permanent establishments (PEs) in the UK (and in some cases those even falling short of being a PE using double tax treaties) which
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.