What is Group Relief?
Group relief is a tax mechanism available to companies that are part of a 75% ownership group. It allows one company within the group to transfer its qualifying losses to another company in the same group. This transfer can help mitigate the group’s overall tax liability by reducing the profits chargeable to corporation tax for the receiving company.
To qualify as a 75% group for the purposes of group relief, certain conditions must be met:
- 75% Ordinary Share Capital: One company must hold at least 75% of the ordinary share capital of another company.
- 75% Distributable Income Rights: The owning company must also control at least 75% of the distributable income rights.
- 75% Rights to Net Assets on Winding-Up: The owning company must hold at least 75% of the rights to the net assets in the event of a winding-up.
From April 1, 2000, these rules were extended so that members of a group no longer need to be residents in the UK to qualify for group relief.
Examples of Group Relief
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Example 1: Company A and Company B are part of the same group, and Company A holds 80% of Company B’s ordinary share capital. Company B experiences a loss of $100,000 during the financial year, whereas Company A has a profit of $150,000. With group relief, Company B can transfer its qualifying loss to Company A, thus reducing Company A’s taxable profit to $50,000.
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Example 2: Company X is the parent of Company Y and Company Z, holding 75% share capital in each. Company Y has a profit of $200,000, but Company Z sustains a loss of $50,000. Through group relief, Company Z’s loss can be transferred to offset some of Company Y’s profit, bringing the taxable profit of Company Y down to $150,000.
Frequently Asked Questions (FAQs)
What are qualifying losses?
Qualifying losses are losses that a company within a group can transfer to other group companies to lower their taxable profit. These include trading losses, excess management expenses, and non-trade deficits on loan relationships.
Are there any conditions for companies to qualify for group relief?
Yes, to qualify for group relief, companies must form a 75% group, wherein one company holds at least 75% of the ordinary share capital, distributable income rights, and rights to net assets on winding-up of another company.
Can overseas companies qualify for group relief?
As of April 1, 2000, companies in a group do not need to be UK residents to qualify for group relief. Therefore, overseas companies can be included if they meet the 75% ownership criteria.
What taxes are affected by group relief?
Group relief specifically impacts corporation tax payable by companies within the 75% group. It reduces the overall group tax liability by allowing the offset of losses against profits within the group.
What is the advantage of group relief for a company?
The primary advantage of group relief is the optimization of the tax position for companies within the same group. By transferring losses to profit-making companies, the overall tax liability is reduced, maximizing retained earnings.
Related Terms
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Consortium Relief: Relief allowing companies in a consortium to share profits and losses proportionately to ownership stakes.
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Corporate Tax: A direct tax imposed on the net income or profit of corporations.
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Trading Loss: Losses incurred from core business operations, which can be offset against profits to lower taxable income.
References & Further Reading
Online Resources
- Gov.uk - Corporation Tax: Trading losses
- HM Revenue & Customs (HMRC) - Group Relief
- The Institute of Chartered Accountants in England and Wales (ICAEW) - Overview of Group Relief
Suggested Books
- “Taxation: Finance Act 2021” by Melville
- This book offers a comprehensive guide to the principles of UK taxation, covering essential topics including group relief in detail.
- “UK Taxation for Students: Finance Act 2021” by Malcolm Finney
- Provides an in-depth study on taxation in the UK, including detailed examples and explanations related to group relief.
- “Taxation: Policy and Practice” by Andy Lymer
- A detailed examination of tax policy, practice, and techniques, with specific chapters on corporate tax planning and group relief.
Accounting Basics: “Group Relief” Fundamentals Quiz
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