Associated Companies and the Marginal Rate Cliff
Delta Ltd is a UK-resident trading company with a 31 March year end. For the year ended 31 March 2025 it has augmented profits of £180,000. Delta owns 100% of Echo Ltd (dormant throughout, no income or chargeable gains) and 60% of Foxtrot Ltd (trading, augmented profits £120,000). Delta's managing director personally owns 100% of Golf Ltd, an unrelated trading company with augmented profits of £90,000; Delta has no interest in Golf. Delta's accounts show taxable total profits of £175,000 before any group relief. Foxtrot has a trading loss of £40,000 for the same period which it wishes to surrender.
1. Determine Delta's number of associated companies and its corporation tax liability for the year ended 31 March 2025, assuming no group relief claim is made.
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Associated companies test (CTA 2010 s18E–18H). Two companies are associated if one controls the other, or both are under common control. Control is tested by reference to the 51% threshold for this purpose.
- Echo Ltd - 100% subsidiary → associated. However, a company that is dormant throughout the accounting period is disregarded for the associated-company count. Not counted.
- Foxtrot Ltd - 60% subsidiary → associated. Counted.
- Golf Ltd - owned by the director personally, not by Delta. Common control is tested on the company's control of other companies, not the director's. Delta does not control Golf, so not associated.
Number of associated companies = 1 (Foxtrot).
Limits. Companies = 2 (Delta + 1 associate). Upper limit £250,000 ÷ 2 = £125,000; lower limit £50,000 ÷ 2 = £25,000. Period is 12 months, so no time apportionment.
Augmented profits £180,000 exceeds £125,000 → main rate 25% applies to the whole of taxable total profits. There is no marginal relief because profits are above the upper limit.
Liability: £175,000 × 25% = £43,750.
The judgement call: the answer turns entirely on the count. If Echo were counted (it is not, being dormant) the limits would halve again and the marginal-relief calculation would change. If Golf were wrongly counted, Delta would also be a main-rate payer at a different effective rate. The exam tests whether you apply the dormancy exclusion and the company-control test rather than counting every company in the director's orbit.
2. Foxtrot wishes to surrender its £40,000 trading loss to Delta. Explain the conditions, compute the revised liability, and identify the constraint that may limit the claim.
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Conditions for group relief (CTA 2010 Pt 5).
- Delta and Foxtrot must be members of the same group at the time the loss is incurred - 75% subsidiary relationship for group relief purposes. Delta holds only 60%, so this condition is not met on a direct holding. Group relief is unavailable unless a consortium or indirect holding analysis applies (none is given).
- The surrendering company must be UK-resident or within the charge to UK tax; Foxtrot is a UK trading company.
- The loss must be a trading loss available for group relief (not a capital loss), and the claim must be made by the surrendering company's filing date (or within 60 days of a HMRC determination).
The judgement: the 60% holding fails the 75% test. The claim as described cannot be made. The common misconception is to assume any subsidiary qualifies; the 75% effective holding test (direct or indirect, with entitlement to profits, assets on winding up and voting power) is the gate.
If a valid group relief claim were available (i.e. had Delta held 75%+), Delta's taxable total profits would fall to £175,000 − £40,000 = £135,000. That still exceeds the £125,000 upper limit, so the main rate of 25% would continue to apply: £135,000 × 25% = £33,750, a saving of £10,000 (25% × £40,000).
Constraint to flag: group relief cannot create or increase a loss; it is restricted to the claimant's taxable total profits. Here the constraint is not quantum but eligibility - the 60% holding is fatal.