Memorandum
Client Hahn Ltd group
Subject Group loss planning and other matters
Prepared by Tax senior
Date 8 September 2016
(i) Chargeable gain of Frit Ltd
The additional qualifying assets which would need to be purchased in order for the chargeable gain realised by Frit Ltd to be fully relieved by its capital losses brought forward is calculated as follows:

Tutorial notes:
1. The amount of the chargeable gain which cannot be rolled over will be the amount of sales proceeds not reinvested. Accordingly, an amount of £31,000 should not be reinvested, such that only £34,000 of the gain will be rolled over and the remaining £31,000 of the gain will be relieved by the capital losses brought forward.
2. The additional assets can be purchased by any member of the capital gains group. The group consists of all of the companies apart from Joli Ltd (not a 75% subsidiary of Hahn Ltd) and Ruth Ltd (not a 75% subsidiary of Lise Ltd). Therefore, the £6,000 spent on purchases of assets by Ruth Ltd does not represent a qualifying reinvestment for the purposes of rollover relief
(ii) Relieving the trading loss of Frit Ltd
Intercompany trading
A transfer pricing adjustment will be required in respect of the sales at undervalue from Hahn Ltd to Stra Ltd. This is because Hahn Ltd controls Stra Ltd, and the group is large for the purposes of the transfer pricing rules. Accordingly, the trading profit of Hahn Ltd must be increased by £10,000 (£104,000 – £94,000), the excess of the arm’s length price over the price charged for the intra-group sales. As Stra Ltd is also within the charge to UK corporation tax, its trading profits can be reduced by the same amount.
Rationale for the allocation of the trading loss
In order to maximise the benefit to the group’s cash flow position, Frit Ltd’s trading loss should be surrendered to those companies paying corporation tax by quarterly instalments.
​​​​​​– First to any company whose profits can be reduced to the payment by instalments threshold, such that instalments will no longer be required;
– then to any other company with profits in excess of the payment by instalments threshold, such that their instalments will be reduced;
– finally, to any other company.
The payment by instalments threshold for the Hahn Ltd group companies (excluding Chad Ltd) for the year ending 31 March 2017 is £300,000. This is the threshold of £1,500,000 divided by five (the number of 51% group companies as at 31 March 2016 being Hahn Ltd, Frit Ltd, Lise Ltd, Ruth Ltd and Stra Ltd).
The threshold for Chad Ltd for the year ending 31 March 2017 is £187,500. This is the threshold of £1,500,000 divided by eight (the number of 51% group companies in the Zeno Ltd group as at 31 March 2016, being Zeno Ltd and its effective 51% subsidiaries).
Tutorial note: The instalments threshold is divided by the number of 51% group companies as at the end of the previous accounting period.
Allocation of the loss​​​​​​​

Notes
1. The taxable total profits of Lise Ltd should be reduced to no more than £300,000 so that the company will not have to pay corporation tax by instalments.
2. Chad Ltd will have been a member of the group relief group for only seven months of the accounting period. Accordingly, the maximum loss which can be surrendered by Frit Ltd to Chad Ltd is £315,000, i.e. the lower of:
Frit Ltd – loss for the corresponding seven-month period of £315,000 (£540,000 x 7/12); and
Chad Ltd – profit for the corresponding seven-month period of £393,750 (£675,000 x 7/12).
This is not sufficient to reduce the taxable total profits of Chad Ltd to £187,500 but it will reduce the company’s corporation tax liability and therefore the instalments due.
​​​​​​3. The trading profit of Stra Ltd of £28,000 (£38,000 – £10,000) will be reduced to zero by its trading loss brought forward.
​​​​​​4. Joli Ltd and Ruth Ltd are not effective 75% subsidiaries of Hahn Ltd and are therefore not in the group relief group.
Tutorial note: It would be equally acceptable to surrender the balance of the loss of £150,000 to Lise Ltd rather than Hahn Ltd because the corporation tax liability of both companies is due on 1 January 2018 rather than by quarterly instalments.
Corporation tax liabilities for the year ending 31 March 2017​​​​​​​

Frit Ltd and Stra Ltd will have no taxable total profits and therefore will not have a corporation tax liability.
Payment schedule

Group registration for the purposes of value added tax (VAT)
A group registration could be made in respect of all of the companies in the Hahn Ltd group with the exception of Joli Ltd (because this company is not controlled by Hahn Ltd). However, it is not necessary to include all of the qualifying companies within the group registration.
Sales from one company in the VAT group to another would be disregarded for the purposes of VAT. Therefore, there would be no requirement to charge VAT on the sales made by Hahn Ltd to Stra Ltd.
The annual accounting scheme is not available where companies are registered as a group. The cash accounting scheme would be available but only if the group’s taxable turnover was less than £1,350,000. These matters should be considered before deciding whether or not Stra Ltd should be included in the group registration.
The inclusion of Frit Ltd in the group registration would result in the group being partially exempt. This could increase the total input tax recovered by the group, for example, if the results of the group as a whole satisfy the partial exemption de minimis limits. Alternatively, the calculation of the recoverable input tax for the group as a whole could result in a reduction in the total input tax recovered. Accordingly, further consideration is required before deciding whether or not Frit Ltd should be included in the group registration.

Chad Ltd – refund of VAT
We should investigate the VAT reporting of Chad Ltd in order to determine whether or not there is a valid reason for the refund.
If we are unable to identify a valid reason, we would have to conclude that the refund was made as a result of error on the part of HM Revenue and Customs (HMRC), in which case it should be repaid immediately. We should inform Chad Ltd that failing to return the money in these circumstances may well be a civil and/or a criminal offence.
We should also advise Chad Ltd to inform HMRC of their error as soon as possible in order to minimise any interest and penalties which may otherwise become payable.
If Chad Ltd is unwilling to return the money, we would have to consider ceasing to act as advisers to the company. We would then have to notify the tax authorities that we no longer act for Chad Ltd, although we would not provide them with any reason for our action. We should also consider whether or not it is necessary to make a report under the money laundering rules.