ACCA Applied Skills · Taxation (UK)

The effect of a group corporate structure for corporation tax purposes: formula sheet

Full chapter guide

Key formulas

Adjusted lower limit: £50,000 ÷ number of associated companies (including the company itself); Time-apportion too if the accounting period is under 12 months.
Adjusted upper limit: £250,000 ÷ number of associated companies (including the company itself); Augmented profits at or above this limit means the main rate of 25% on all taxable total profits.
Marginal relief: (Upper limit – augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Use the adjusted upper limit. Deduct the relief from tax at 25%.
Quarterly instalment threshold: £1,500,000 ÷ number of associated companies; Profits above this are 'large' for instalment purposes. Check the exact rules in the topic on instalments.
Rate by profit level: Augmented profits ≤ lower limit: 19%. ≥ upper limit: 25%. Between: 25% less marginal relief; Augmented profits = taxable total profits plus exempt dividends received from non-group companies.
Gains group test: Company is a 75% subsidiary of the principal company (directly or indirectly, ordinary share capital) AND the principal company has an effective interest of more than 50% in it; Both tests must be met. Check indirect holdings by multiplying percentages along the chain.
No gain no loss transfer: Deemed proceeds = cost + enhancement expenditure; Transferee takes this figure as its cost. No gain or loss arises on the transfer.
Degrouping charge condition: Company leaves the group while still holding an asset acquired by a no gain no loss transfer from a group company; Asset treated as sold and reacquired at market value at the time of the original transfer. The gain or loss arises immediately before the company leaves the group.
Degrouping gain: Market value at the time of the transfer − (cost + enhancement expenditure); Added to or deducted from the proceeds of the share sale.
Joint election: Whole or part of a gain or loss on a disposal outside the group by one gains group company treated as made by another company in the same gains group; Both companies must make the election. Used to match gains with capital losses.
Reinvestment window: 12 months before the disposal to 36 months after the disposal; The replacement can be bought by any member of the same group, as long as the group conditions are met.
Full relief: If proceeds reinvested ≥ proceeds received, the whole gain is deferred; Base cost of replacement = cost of replacement − deferred gain.
Partial reinvestment: Gain taxed now = lower of (gain) and (proceeds − amount reinvested); Deferred gain = total gain − gain taxed now.
Base cost of replacement: Cost of replacement − gain deferred; This is how the deferred tax is eventually collected on a later sale.
Depreciating assets: Gain is held over until the earliest of: disposal of the replacement, it ceasing to be used in the trade, or 10 years from acquisition; A depreciating asset is one with an expected life of 60 years or less, such as fixed plant and machinery. The held-over gain is not deducted from the base cost. The gain is deferred until the earliest of the three events.
Claim time limit: The claim must be made within 4 years of the end of the accounting period of the disposal or, if later, of the acquisition; A claim made after this date is invalid, so state the deadline in a written answer.
Large company threshold (12-month period): £1,500,000 ÷ number of associated companies (including the company itself); Large if augmented profits EXCEED this figure. The £1,500,000 is given in the tax tables.
Short accounting period: Threshold = £1,500,000 × months in period ÷ 12 ÷ number of associated companies; Time-apportion first, then divide by the number of associated companies.
Augmented profits: Taxable total profits + exempt dividends received from non-group companies; Dividends from 51% group companies are left out.
Instalment amount: Estimated corporation tax liability for the period ÷ 4; Each of the four instalments is 25% of the liability for a 12-month period.
Instalment due dates (12-month period): 14th day of months 7, 10, 13 and 16 after the start of the accounting period; The first is 6 months and 13 days after the period starts.
Exception for newly large companies: Not treated as large if augmented profits ≤ £10,000,000 ÷ number of associated companies and the company was not large in the previous period; The £10,000,000 is not in the tax tables, so learn it. Check how your study text applies it.
75% subsidiary: Parent holds ≥ 75% of ordinary share capital (plus ≥ 75% of distributable profits and of assets on a winding up); Test for a group relief group. 75% exactly passes. Below 75% fails.
Effective interest: Effective % = % in first company × % in second company × ...; Multiply along the chain. The parent's effective interest in the lowest company must be at least 75% for group relief. Apply the same effective test to profits available for distribution and to assets on a winding up.
Group relief chain: Each link must be a 75% subsidiary AND the parent's effective interest in the lowest company ≥ 75%; Passing the link tests alone is not enough. If the effective test fails for top and bottom, the linked pairs (A and B, B and C) are still grouped.
Consortium company: Trading company that is not a 75% subsidiary of another company, with ≥ 75% of ordinary share capital beneficially owned between companies each holding ≥ 5%; or a trading company that is a 75% subsidiary of a non-trading holding company owned by a consortium; Member claiming the consortium company's loss: limit is the lower of the member's % of the loss and the member's profits. Member's loss surrendered to the consortium company: limit is the lower of the loss and the member's % of the consortium company's profits.
Group relief limit: Relief claimed ≤ lower of the loss available and the claimant's taxable profits; Losses and profits are matched for overlapping periods.

Quick revision

Corporation tax rates: small profits rate 19%, main rate 25%, with limits of £50,000 and £250,000, given in the exam.
Marginal relief = (£250,000 – augmented profits) × 3/200 × taxable total profits ÷ augmented profits.
Associated companies share the limits: with 2 companies the limits are £25,000 and £125,000, with 4 they are £12,500 and £62,500.
Two companies are associated if one controls the other, or both are controlled by the same person or persons. Associated status does not need a 75% group. Include overseas companies. Exclude dormant companies from the count.
Group relief needs a 75% group. One company must own at least 75% of the other's ordinary share capital (directly or indirectly) and be entitled to at least 75% of its profits available for distribution and of its assets on a winding up. A claimant can claim no more than its own profits for the period.
Losses are surrendered to a claimant company, and the claimant's profit is cut by the amount claimed.
Where accounting periods differ, only the overlapping part of each period is matched.
Assets transfer within a gains group at no gain and no loss. The gain arises on sale outside the group.
A degrouping charge arises only if a company leaves the group within six years of receiving an asset from a group company on a no gain/no loss transfer, and it still owns that asset when it leaves. The gain is computed as if the company had sold and immediately reacquired the asset at market value at the date of the intra-group transfer. Where the company leaves because another group company sells its shares, the charge is normally treated as an adjustment to the proceeds of that share sale. Otherwise it is included in the leaving company's chargeable gains for the period it leaves.
For rollover relief, the group is treated as one for purchases of qualifying replacement assets.
Quarterly instalments apply only to large companies, meaning those with augmented profits above £1,500,000. The threshold is divided by the total number of associated companies, counting the company itself, whether or not they form a 75% group, so a company with associates may be large at lower augmented profits. A company that was not large in the previous period is not treated as large if its augmented profits do not exceed £10,000,000, also divided by the number of companies.
The instalment dates are not given in the Tax Tables, so you must learn them. For a large company with a 12-month accounting period, instalments fall due on the 14th day of months 7, 10, 13 and 16 after the period starts.

Common mistakes

Dividing by the number of other companies, not the total including the company itself. Fix: Add one for the company being taxed. Two associates means divide by 3.
Using the unadjusted £250,000 in the marginal relief formula. Fix: Use the adjusted upper limit in every step, including the formula.
Computing a gain on a transfer between group companies. Fix: If both companies are in the gains group, deemed proceeds equal cost plus enhancement, so there is no gain or loss.
Using market value as the transferee's base cost after an intra-group transfer. Fix: The transferee takes over the transferor's original cost and enhancement expenditure.
Denying relief because a different company bought the replacement. Fix: For a chargeable gains group, treat the members as one unit. The buyer can be any group member.
Deferring the whole gain when only part of the proceeds were reinvested. Fix: Work out the proceeds not reinvested. The gain taxed now is the lower of that figure and the gain.
Leaving the company itself out when counting associates Fix: Always count the company itself. A parent with two subsidiaries means three companies and a threshold of £500,000.
Using taxable total profits instead of augmented profits Fix: Add exempt dividends from non-group companies before comparing with the threshold.
Using the 51% test for group relief Fix: For group relief the test is 75% of ordinary shares. The 51% test is a different group test, used for example in chargeable gains groups. Write '75% = group relief' in your notes.
Passing a chain because each link is 75% or more Fix: Multiply along the chain. 80% × 80% = 64%, which is below 75%, so the top and bottom companies are not grouped. Remember the same effective test applies to distributable profits and assets on a winding up. The linked pairs, such as A and B, and B and C, are still grouped.

Exam tips

Read the question for how many companies there are. Check whether 'associated' numbers include or exclude the company itself.
Show the adjusted limits clearly in written answers. Marks are given for them even if later figures are wrong.
In objective tests, test the profit level against the adjusted limits first. Many questions need no marginal relief calculation.
Always add exempt dividends to get augmented profits, but tax only the taxable total profits.
The rates, limits and the 3/200 fraction are given in the tax tables in the exam. You still must remember how to apply them.
Draw the group diagram first. Marks often come from correctly stating whether the 75% test and the effective interest test are met.
Say 'no gain no loss' by name, and give the figure passed on: cost plus enhancement expenditure.
For degrouping, state that the company must leave the group while still holding an asset acquired by a no gain no loss transfer. The asset is treated as sold and reacquired at market value at the time of the original transfer, with the gain or loss arising immediately before the company leaves.