What can be transferred between group members?

Corporation Tax relief may be available when a company or organisation makes a trading loss. Companies that are eligible for group relief can transfer losses and certain other deficits to companies within the same group by means of Group or Consortium Relief. The use of group relief allows losses arising in the accounting period to be surrendered to a group company for that period. 

Companies attempting to either surrender or claim losses for Group Relief or Group Relief for carried forward losses, must meet the required conditions. For companies to be members of the same group, one company must be a 75% subsidiary of the other, or both must be 75% subsidiaries of a third company. The definition of ‘75% subsidiary’ requires one company to have direct or indirect beneficial ownership of at least 75% of the ordinary share capital in another. There are also further qualifying tests that may apply for group relief purposes, and this can be a complex area. 

Under Section 99 – Corporation tax Act 2010 the following losses (when qualifying) can be surrendered and claimed as group relief:

  • a trading loss 
  • a capital allowances excess 
  • non-trading deficit on loan relationship 
  • amounts allowable as qualifying charitable donations 
  • a UK property business loss 
  • management expenses 
  • a non-trading loss on intangible fixed assets 

Switching between film and TV reliefs

Film tax relief (FTR) can increase the amount of expenditure that is allowable as a deduction for tax purposes or, if a company makes a loss, can be surrendered for a payable tax credit. To qualify for relief, films must be intended to be shown commercially in cinemas and at least 10% of the core costs must relate to activities in the UK. In addition, the film must be certified as British, either by passing a cultural test or under an agreed co-production treaty. The FTR allows qualifying companies to claim a payable cash rebate of up to 25% on UK qualifying expenditure.

One issue that has arisen since the FTR was first introduced, and accelerated during the pandemic, is the fact that more films are released directly to video on-demand services. This creates an issue for claiming FTR as one of the conditions is that the film must be intended for release to the public in cinemas. It is also not currently possible to retroactively qualify for high-end TV tax relief (HETV) because that would only be possible at the outset of filming.

The government is now proposing to allow claimants to continue claiming FTR even if the film is not released in cinemas but would otherwise qualify for the HETV. The new measure is expected to come into force from 1 April 2022.

Payments received after company is dissolved

Any assets or rights (but not liabilities) remaining in a company at the date of dissolution will pass to the Crown as ownerless property. This happens under what is known as 'bona vacantia' which literally means vacant goods. The bodies that deal with bona vacantia claims vary across the United Kingdom, but they all ultimately represent the Crown.

The final step in bringing a company to a legal end is when the company is dissolved. Payments received after a company has dissolved are not bona vacantia as they are not an asset of the company immediately prior to dissolution. HMRC’s pursuit of a company debt should also cease as soon as the company is dissolved.

In fact, HMRC’s internal manuals state that:

Any payments voluntarily made by an ex-official after the company is dissolved (i.e., no action was taken to recover the debt after the company was dissolved) should be used in satisfaction of any company debt arising for a period before the date of dissolution. If no such debt exists, or there is an excess of funds, then steps should be taken to send the overpayment back to the sender. Any sums that cannot be returned should be allocated to Permanent Overpayments.

Corporation Tax loss buying

Under qualifying circumstances, Corporation Tax (CT) relief is available where a company makes a trading loss. The trading loss can be used to claim CT relief by offsetting the loss against other gains or profits of a business in the same or previous accounting period. The loss can also be set against future qualifying trading income.

There are however restrictions on ‘loss-buying’. These are situations where a person buys a trading company wholly or partly for its unused trading losses rather than solely for the inherent value of its trade or assets. The new owner usually seeks to introduce new activity into the company to keep its entitlement to loss relief.

The legislation governing this area can result in all the company’s unused carried- forward trading losses being cancelled where either:

  • within any specified period, there is both; a change in the ownership of a company, and a major change in the nature or conduct of a trade carried on by the company,

or

  • there is a change in ownership of a company at a time when the scale of its trading activities has become small or negligible.

For accounting periods beginning on or after 1 April 2017, the specified period is 5 years beginning no more than 3 years before the change in ownership occurs.

Goodwill and Corporation Tax

Goodwill is rarely mentioned in legislation. Most people would settle on a simple definition which would be based on the ‘extra’ value of a business over and above its tangible assets.

In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of placing a monetary value on the business's reputation and customer relationships. Or as HMRC say in their guidance, in accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired. Valuing goodwill is complex and there are many different methods which can be used and that vary from industry to industry.

The Corporation Tax relief restriction rules for certain acquisitions of goodwill and relevant assets changed on 1 April 2019.

Businesses can now claim Corporation Tax relief on purchases of goodwill made on or after 1 April 2019 if the:

  • goodwill and relevant assets are purchased when you buy a business with qualifying intellectual property (IP)
  • business is liable to Corporation Tax
  • relevant assets (including goodwill) are included in the company accounts

If relief is available, it is at a fixed rate of 6.5% a year on the lower of the cost of the relevant asset or 6 times the cost of any qualifying IP assets in the business purchased. Relief is given yearly until the limit is reached and a claim is made using the Company Tax Return.

When is a company dormant for tax purposes?

If a company has stopped trading and has no other income then the company is usually classed as dormant for Corporation Tax purposes.

A company is usually dormant for Corporation Tax if it:

  • has stopped trading and has no other income, for example investments
  • is a new limited company that hasn’t started trading
  • is an unincorporated association or club owing less than £100 Corporation Tax
  • is a flat management company

HMRC can also send a notification if they think a company is dormant. This notice will state that a company or association is dormant and is not required to pay Corporation Tax or file Company Tax Returns.

Limited companies are still required to file annual accounts and a confirmation statement even if the company is dormant for Corporation Tax and according to Companies House. A company defined as 'small' by Companies House can instead file 'dormant accounts' and doesn’t have to include an auditor’s report.

A dormant company must also ensure they deregister for VAT within 30 days of the company becoming dormant and close any unused PAYE schemes. A company can stay dormant indefinitely, however there are costs associated with this option. This might usually be done if for example a company is restructuring its operations or wants to retain use of a company name, brand or trademark.

Associated company rules

As announced in the Budget earlier this year there will be two rates of Corporation Tax from 1 April 2023. When the new rules take effect, taxable profits up £50,000 will continue to be taxed at 19% under the new Small Business Profits Rate. Taxable profits more than £250,000 will be taxed at 25%. 

The introduction of the two new rates will once again make the issue of associated companies important to consider. Under the new rates, profits between £50,000 and £250,000 will be subject to a marginal tapering relief. This would be reduced for the number of associated companies and for short accounting periods.

A company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons. 

The £250,000 limit will be divided by the total number of associated companies. For example, if two companies are deemed to be associated, both companies would pay the main CT rate of 25%, from 1 April 2023 at half the usual threshold, namely at £125,000 rather than £250,000. 

HMRC’s manuals make it clear that a company may be an associated company no matter where it is resident for tax purposes.

Pre-trading expenditure

There are special tax reliefs for pre-trading expenses that are incurred before a business starts trading. These could include expenses that are required to help a business prepare for trading such as buying stock and equipment, renting premises, taking out insurance and initial advertising expenditure. 

A deduction may be allowed where the following conditions are met: 

  • The expenditure is incurred within a period of seven years before the date the trade, profession or vocation commenced, and
  • the expenditure is not otherwise allowable as a deduction in computing the profits of the trade, profession or vocation but would have been so allowable if incurred after the trade had commenced.

To be allowable, the pre-trading expenditure must be incurred wholly and exclusively for the purposes of the relief. This means that no relief would be allowed where pre-trading expenses would not have been tax deductible if they had been incurred when the business was trading.

The business should keep accurate records relating to pre-trading expenditure to demonstrate that the expenses qualify.

Qualifying pre-trading expenditure is treated as incurred on the day on which the trade, profession or vocation is first carried on. 

Capital expenditure does not qualify for this relief but there are other special provisions for capital allowances. 

Restarting a dormant or non-trading company

HMRC must be informed when a non-trading or dormant company starts trading again and becomes active for Corporation Tax. Companies can use HMRC Online Services to supply the relevant information. 

When a company has previously traded and then stops, it would normally be considered as dormant. A company can stay dormant indefinitely, however there are costs associated with doing this and certain filings must still be made to Companies House. The costs of restarting a dormant company are typically less than starting from scratch again. 

The following steps are required:

  1. Tell HMRC that your business has restarted trading by registering for Corporation Tax again.
  2. Send accounts to Companies House within 9 months of your company’s year end.
  3. Pay any Corporation Tax due within 9 months and 1 day of your company’s year end.
  4. Send a Company Tax Return – including full statutory accounts – to HMRC within 12 months of your company’s year end.

Whilst reporting dates for annual returns and accounts should remain the same. The Corporation Tax accounting period is different and is set by reference to when the company restarts business activities.

Companies can claim super-deduction from 1 April

The new super-deduction tax break, that will allow companies to deduct 130% of the cost of any qualifying investment from their taxable profits, is available on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 a company invests they can reduce their Corporation Tax bill by up to 24.7p. The new temporary tax relief applies on qualifying capital asset investments from 1 April 2021 until 31 March 2023. 

The super-deduction is designed to help companies finance expansion in the wake of the coronavirus pandemic and help to drive growth. This change makes the Capital Allowance regime more internationally competitive, lifting the net present value of the UK’s plant and machinery allowances from 30th in the OECD to 1st.

Commenting on the introduction of the super-deduction, the Chancellor of the Exchequer Rishi Sunak said:

'The super-deduction is the biggest two-year business tax cut in modern British history – driving our economy by helping businesses to invest, grow and support our Plan for Jobs. I urge firms across the UK to invest in our recovery by taking advantage of this great opportunity.'

An enhanced first year allowance of 50% on qualifying special rate assets has also been introduced for expenditure within the same period. This includes most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. 

The measures have effect in relation to qualifying expenditure from 1 April 2021 and excludes expenditure incurred on contracts entered into prior to Budget day on 3 March 2021.