UK Corporation Tax Group Relief: A Practical Guide

Group relief is one of the most important corporation tax reliefs available to UK corporate groups. It allows companies within the same group to offset certain losses against the taxable profits of other group members, improving overall tax efficiency and cash flow.

This article outlines how group relief works, the conditions that must be satisfied, and the key technical points businesses should understand.

How Are Groups of Companies Taxed

For UK tax purposes, each company is treated as a separate legal and taxable entity. Every company must submit its own corporation tax return and account for tax individually to HM Revenue & Customs.

However, special rules apply where companies form a group. In certain circumstances, the tax system recognises the economic unity of a group structure. For example:

• Capital assets can usually be transferred between group companies without triggering an immediate chargeable gain.

• Groups may operate a group payment arrangement, allowing one company to settle corporation tax liabilities for other group members.

• The group relief regime allows loss-making companies to surrender qualifying losses to profitable group companies.

Importantly, the definition of a “group” varies depending on the tax in question. The rules for corporation tax group relief are specific and must be carefully applied.

Note that companies can form a VAT group so that supplies between members are ignored for VAT purposes – this is not covered in this article.

What Is Group Relief?

Group relief allows a company that has made a qualifying loss (the surrendering company) to surrender that loss to another group company (the claimant company) that has taxable profits.

The claimant company can then use the surrendered loss to reduce its corporation tax liability for the same accounting period.

Although not a legal requirement, it is common commercial practice for the claimant company to compensate the surrendering company for the tax benefit received. With the main corporation tax rate currently at 25% for many companies, this typically means a payment equal to 25% of the losses surrendered.

Such payments:

• Are not taxable income in the hands of the surrendering company; and

• Are not deductible for corporation tax purposes by the claimant company.

From a commercial perspective:

• The surrendering company converts carried-forward losses into immediate cash.

• The claimant company effectively pays the tax it would have paid to HMRC to a fellow group member instead.

Carried Forward Losses and the £5 Million Restriction

Significant changes were introduced from 1 April 2017.

Carried-forward losses can now generally be set against a broader range of total profits, giving groups greater flexibility.

However, a restriction applies where a group’s taxable profits exceed £5 million:

• Only 50% of profits above the £5 million annual allowance can be offset by carried-forward losses.

• The £5 million allowance applies at group level, not per company.

This restriction can materially affect larger groups with historic losses.

Conditions for Group Relief

The legislation is detailed and technical, but the key requirements are as follows.

UK Tax Presence

Both the surrendering company and the claimant company must:

• Be UK tax resident; or

• Carry on a trade in the UK through a permanent establishment.

75% Group Relationship

The companies must be members of the same 75% group.

Broadly, this means:

• One company must beneficially own at least 75% of the ordinary share capital of the other; or

• A third company must beneficially own at least 75% of both.

This ownership can be direct or indirect.

In addition to the share capital test, there are further economic ownership tests that consider:

• Rights to distributable profits

• Rights to assets on a winding up

• The position of equity holders (which can include certain loan creditors)

• The impact of options and other arrangements

These additional requirements are often where technical difficulties arise, particularly where there are preference shares, external investors, or structured finance arrangements.

Losses may be surrendered in any direction, parent to subsidiary, subsidiary to parent, or between sister companies, provided the tests are satisfied.

Which Losses Can Be Surrendered?

Only certain types of income losses qualify for group relief. The main categories include:

• Trading losses

• Non-trading loan relationship deficits

• Excess management expenses

• UK property business losses

• Certain non-trading intangible fixed asset losses

• Capital allowances excess

The amount that can be surrendered is limited to the lower of:

• The available qualifying loss in the surrendering company; and

• The available taxable profits in the claimant company.

Group relief cannot create or increase a loss in the claimant company.

Where companies have different accounting periods, time-apportionment rules apply to determine the amount available for surrender.

How Is Group Relief Claimed?

The claimant company makes the claim in its corporation tax return.

Key practical points include:

• Claims must generally be made within two years of the end of the relevant accounting period.

• The claim must specify the amount of relief and identify the surrendering company.

• The surrendering company must provide written consent before or at the time the claim is made.

If a claim exceeds the amount available for surrender, it will be ineffective to the extent of the excess.

Anti-Avoidance Provisions

Group relief is denied where, at the time losses arise, arrangements are in place under which:

• The company could leave the group; or

• Control could pass to different persons (for example, under a planned sale).

In addition, if losses arise from arrangements lacking genuine commercial purpose, such as loans entered into for an unallowable tax avoidance purpose, HMRC may deny the deductibility of those losses entirely. In such cases, tax returns and group relief claims may need to be amended.

Consortium Relief

In addition to standard group relief, consortium relief may apply in joint venture situations.

Broadly, a consortium exists where:

• At least 75% of a company’s ordinary share capital is owned by other companies; and

• Each of those companies owns at least 5%.

This commonly arises where two or more companies establish a joint venture company.

Under consortium relief:

• A shareholder may claim only its proportionate share of the joint venture company’s losses.

• The joint venture company may receive losses from a shareholder only in proportion to that shareholder’s interest.

Since 1 April 2017, carried-forward losses may also be surrendered under consortium relief, subject to detailed conditions.

Final Thoughts

Group relief is a powerful and commercially valuable feature of the UK corporation tax system.

When applied correctly, it allows groups to:

• Optimise tax efficiency

• Improve intra-group cash flow

• Align tax outcomes with economic reality

However, the ownership tests, carried-forward loss restrictions and anti-avoidance provisions are highly technical. Careful review is essential, particularly where there are external investors, financing arrangements or corporate transactions.

If you would like to discuss how group relief applies to your structure, or if you are unsure whether your group meets the technical conditions, please get in touch. The rules are detailed and highly fact-specific, particularly where there are external investors and joint ventures. Early advice can help ensure losses are used efficiently and avoid unexpected tax exposures.

Authored by: London Team