UK corporation tax group relief

The guide only looks at income losses such as trading losses. It does not look at capital losses, which are subject to different rules.

How are groups of companies taxed?

The basic principle is that each company is a separate taxable entity for UK tax purposes, required to complete returns and account for tax to HMRC. However, special rules mean that some transactions between group companies are ignored for tax purposes and, for some tax purposes, groups can be treated as if they were one entity. For example:

• capital assets can be transferred between group companies without triggering a disposal for the purposes of corporation tax on chargeable gains and free of stamp duty and stamp duty land tax;
• groups can choose to account for corporation tax through only one company in the group, known as a group payment arrangement;
• group companies can be within the same VAT group so that supplies between group members are ignored for VAT purposes and one group member pays VAT on behalf of the whole group;
• group relief rules allow companies that are making corporation tax losses to surrender those losses to profit-making group companies.

Group relationships can be established in relation to a variety of different taxes. Each tax has a different definition of what a group of companies means for its purposes.

Group relief is an important and useful relief for groups of companies, and this guide looks in more detail at the mechanics of the relief and the tests that need to be satisfied for the relief to operate.

What is group relief and how does it work?

A company – known as the 'surrendering company' – which makes a corporation tax loss can surrender certain types of loss to another company in the same group of companies as itself. The company to whom the loss is surrendered – known as the 'claimant company' – can use the loss surrendered to it to reduce its liability to corporation tax.

Although not a legal requirement, it is common practice that the claimant company will pay the surrendering company for the loss received up to an amount of the tax saved. Assuming a 25% corporation tax rate (as the rate of UK corporation tax was increased to 25% from April 2023), the claimant company will pay the surrendering company 25% of the losses surrendered. Any such payment is ignored for tax purposes, so it will not be taxable as income earned by the surrendering company or deductible as an expense against taxable profits for the claimant company.

From the surrendering company's perspective, a surrender of group relief transforms a loss that it would otherwise have to carry forward and use in later years into an immediate cash sum. From the claimant company's perspective the transaction is economically neutral – the group relief cancels out its corporation tax bill, so it effectively pays the tax it would have paid to HMRC to its fellow group member.

From 1 April 2017, new rules were introduced allowing more flexibility regarding the types of profits that can be relieved by carried forward losses. Previously, certain carried forward losses could only be offset against certain specified profits.

However, alongside this relaxation, a restriction was also introduced limiting the amount of profits that could be reduced by carried forward losses. From 1 April 2017, companies with profits greater than £5 million can only offset 50% of their profits against losses carried forward. The £5 million profit ceiling applies per group, rather than per surrendering company, so can have a significant impact on larger groups with loss-making members.

What are the conditions for group relief?

The detailed rules are complex, but essentially the surrendering company and claimant company must both be based in the United Kingdom: either by being tax resident in the UK, or by carrying on a trade through a UK permanent establishment. Prior to 27 October 2021, in limited circumstances non-UK tax resident companies based in, or carrying on a trade in, a European Economic Area territory could surrender group relief to a UK company. However, this exception was abolished in the 2022 Finance Act.

The surrendering company and the claimant company must also be part of the same group of companies. Broadly, the grouping requirement for this relief means that one company must be the beneficial owner of 75% or more of the other company's ordinary share capital, or else a third company must be the beneficial owner of 75% or more of both company's ordinary share capital. This percentage can be achieved through direct or indirect ownership.

There are additional group tests, designed to test true economic ownership of the company, which look at the rights of all equity holders. Equity holders are shareholders or loan creditors other than holders of fixed-rate preference shares and lenders who have made 'normal commercial loans'. These tests are complex, and need careful consideration where any shares are held or loans are made by a third party, or where any sort of option arrangement exists in relation to any shares in the company.

Losses can be surrendered in any direction – from parent to subsidiary company, subsidiary to parent company or sister to sister company – if the companies satisfy these tests.

Which losses are available for group relief?

Only particular types of income loss are available for group relief, the most important being trading losses, excess interest charges and management expenses.

The maximum amount of group relief that can be surrendered is the lower of the available loss in the surrendering company or the available profit in the claimant company. The amount surrendered cannot create a loss in the claimant company – the surrendering company can only surrender enough group relief to the claimant company to extinguish its tax bill.

Companies in a group tend to have the same accounting periods, and so the relief can easily be applied to the appropriate amount of profit in the claimant company. Special rules exist where the companies do not have the same accounting periods to allow group relief on a time-apportioned basis.

Time limits and process for claims

The claimant company claims group relief on its company tax return. Claims can usually be made up to two years after the end of the relevant accounting period.

The claim must specify and quantify the amount of relief being claimed and must specify which company is the surrendering company. The amount claimed can be less than the amount available for surrender, but if the amount claimed is stated to be more than the available amount then the claim will be ineffective.

The surrendering company must consent to the surrender in writing at the time of, or before, the claim is made.

Anti-avoidance provisions

Group relief is denied in relation to a company if, at the time when the losses arise, arrangements exist by virtue of which the company could become a member of another group – such as on a sale of the company – or could become controlled by different people.

HMRC may deny the tax deductibility of losses if a surrendering company has generated the losses through an artificial tax deduction scheme – for example, through loans taken out for an unallowable tax avoidance purpose. In such cases, the losses would be treated as though they don’t exist and the surrendering company’s tax return and group relief notices would have to be amended.

Consortium relief

Group relief may also be available where the surrendering company is owned by a consortium, the claimant company is also a member of the consortium and both the companies are based in the UK. Consortium relief is an extension of group relief, which enables losses to be surrendered between companies that are not so closely connected to form a group, but where there is joint ownership forming a consortium. For consortium relief to be available, detailed conditions must be satisfied.

The relief will only be available if there is a consortium. Broadly, there is a consortium where 75% of the surrendering company's shares are held by other companies, each of which owns at least 5% of the surrendering company. A consortium would typically arise where two or more companies set up a joint venture company (JVC). There is no requirement for all members of a consortium to be UK resident, or within the charge to UK corporation tax.

Where a consortium exists:

• only the proportion of the losses of the JVC which is equivalent to the shareholder's interest in the JVC can be surrendered to the shareholder; and
• the JVC can only receive a surrender of losses from a shareholder in respect of the amount of the JVC's profits proportionate to the shareholder's interest in the JVC.

Previously, consortium relief was only available in respect of current year losses. Since 1 April 2017, subject to various conditions being met, carried forward losses can also be surrendered by way of consortium relief.