ACCA Applied Skills · Taxation (UK)

The Use of Exemptions and Reliefs in Deferring and Minimising Corporation Tax

This chapter covers the reliefs that cut or delay a company's corporation tax: rollover relief, capital and trading loss relief, and group relief. It also covers indexation allowance, which is frozen at December 2017. To solve questions, identify the company's gains and losses, check each relief's conditions, apply the best claim, then recompute the tax.

What this chapter covers

This chapter is about what a company can do to pay less corporation tax, or pay it later. A company's chargeable gains are added to its profits and taxed at corporation tax rates, so the same computation covers income and gains. The reliefs here change that computation. Indexation allowance reduces a gain, but it is calculated only from acquisition to the earlier of disposal and December 2017, so it no longer grows. Some reliefs defer a gain (rollover relief). Some use losses to cut profits (capital losses, trading losses and group relief).

Every relief has conditions, and the exam tests the conditions as much as the arithmetic. You must decide whether a company qualifies, which claim to make and in which order. The chapter ends with planning: choosing the relief that gives the best result for a given company or group.

The chapter links to the rest of the paper. You need the corporation tax computation, the rates and the associated company rules first. It uses capital allowances and adjustment of profit to find trading profit. It also feeds the VAT and group questions, and it often appears in Section C as a long corporation tax question with a written advice part.

Corporation tax is a core area of TX-UK, and this chapter covers the gains and loss reliefs tested within it. These topics appear in the objective test cases, where each question is all or nothing, and in the constructed response questions, where you earn marks for method, conditions and clear advice. The conditions are learnable and repeat from sitting to sitting. If you know them, you can score well on questions that other students find messy.

The use of exemptions and reliefs in deferring and minimising corporation tax liabilities: topics in the order to study them

1Chargeable Gains for Companies and IndexationStart here because every other relief in the chapter acts on a company's gains, so you need the basic computation first. Learn indexation allowance as part of it: it runs from acquisition to the earlier of disposal and December 2017, so it is frozen and is not a growing relief.
2Rollover Relief on Business AssetsThis is the main deferral relief for gains. It builds on the gain computation and needs careful work on qualifying assets, timing and partial reinvestment.
3Capital Losses and Group Relief for GainsOnce you can compute gains and use reliefs on them, you learn how losses are used and how gains and losses move within a group.
4Trading Loss Reliefs for CompaniesTrading losses are the main source of income relief, and you need the claim options and their order before moving to groups.
5Group Relief and Corporation Tax GroupsGroup relief extends loss relief across companies, so it comes after you understand a single company's loss claims.
6Planning to Defer and Minimise Corporation TaxPlanning ties everything together, so leave it last. You compare reliefs and advise on the best option.

How to prepare The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Learn this chapter by relief. For each one, know the conditions, the effect on the computation and the time limits. Then practise choosing between reliefs.

Revise the basic corporation tax computation, the rates and the associated company rules. Remember the marginal relief formula from the exam tables: (upper limit – augmented profits) × 3/200 × taxable total profits ÷ augmented profits.
Practise a worked example. If a company's taxable total profits and augmented profits are both £200,000, marginal relief is (£250,000 – £200,000) × 3/200 × 1 = £750. Tax is £200,000 × 25% = £50,000, less £750, so £49,250.
For each relief, write the conditions on one card: who can claim, which assets or losses qualify, the time limits and the effect. Test yourself from memory.
Do short objective questions on each condition. These are all or nothing, so check every condition before choosing your answer.
Practise full corporation tax computations with gains, losses and group relief. Set out each step in a clear layout, and show workings for gains, loss claims and tax.
Practise the written parts. Give a conclusion, give the reason and name the condition that decides it, such as whether a 75% group exists.
Finish with planning questions. Compare the options, work out the tax under each, and recommend one.

Common mistakes in The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Setting capital losses against trading profits.
Fix: Remember that capital losses are only set against chargeable gains. Carry unused ones forward and never back.
Claiming rollover relief without checking that the asset and the reinvestment both qualify.
Fix: Check the asset type, the use in the trade and the reinvestment window before you reduce the gain.
Forgetting to deduct the part of the proceeds that was not reinvested.
Fix: Compare the proceeds with the amount reinvested. The gain is taxed up to the shortfall, and the rest is deferred.
Allowing group relief where there is no 75% group, or for the full year when the companies were grouped for only part of it.
Fix: Check the 75% holding first, then restrict the claim to the overlapping period.
Using the full £50,000 and £250,000 limits for a company with associated companies.
Fix: Count the associated companies early and divide both limits before you compute marginal relief.
Writing advice without comparing the options.
Fix: Compute the tax under each option and recommend the lowest, giving the reason and any conditions.

Last-day revision: The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

A company's chargeable gains are taxed as part of its profits at corporation tax rates, not at CGT rates.
Indexation allowance for a company runs from acquisition to the earlier of disposal and December 2017, so it is frozen and no longer grows. It cannot create or increase a loss.
Rollover relief: the new asset must be bought within one year before or three years after the disposal.
If only part of the proceeds is reinvested, the gain is taxed up to the amount not reinvested.
Capital losses go against gains only, in the same period or carried forward. They cannot be set against income.
Trading losses: first set against total profits of the current period. A carry back of 12 months against total profits needs that current-period claim to be made first. Any unrelieved loss carried forward can be used against total profits. A terminating loss can be carried back 36 months.
Group relief needs a 75% group and covers the overlapping period of group membership only.
Corporation tax limits of £50,000 and £250,000 are divided by the number of associated companies.
The marginal relief fraction is 3/200 and the small profits rate is 19%, with a main rate of 25%.
Quarterly instalments apply to large companies, with a profit threshold of £1,500,000 that is also shared among associated companies.
In planning questions, calculate the tax under each option and then advise.

The use of exemptions and reliefs in deferring and minimising corporation tax liabilities practice questions

The use of exemptions and reliefs in deferring and minimising corporation tax liabilities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The use of exemptions and reliefs in deferring and minimising corporation tax liabilities: frequently asked questions

What is the quickest way to learn the conditions for each relief?

Write each relief on a card with its conditions, time limits and effect. Test yourself from memory, then do short objective questions. Conditions are examined repeatedly, so they are worth learning exactly.

Do companies pay capital gains tax?

No. A company's chargeable gains are included in its profits and taxed at corporation tax rates. The CGT rates and annual exempt amount apply to individuals.

Does rollover relief remove a gain from tax?

No. Rollover relief defers the gain by reducing the cost of the new asset, so the gain is taxed later. It does not make the gain exempt.

Where do these topics appear in the exam?

They can appear in the objective test questions and in the constructed response questions. The objective questions are all or nothing. The long questions reward clear workings, conditions and written advice.