CIMA Financial Reporting (F1) Practice Exam

Which of the following is a reason for claiming group loss relief?

Relief can be claimed earlier because the surrendering entity does not expect to make a profit in the foreseeable future. Tax can be saved because the entity the loss is surrendered to pays a higher rate of tax than the surrendering entity. It reduces the tax payable for both entities by the same amount It is only available if both entities have profits

Correct Answer:

Tax can be saved because the entity the loss is surrendered to pays a higher rate of tax than the surrendering entity.

Explanation:

Group loss relief lets a loss-making group company surrender its trading losses to another group member that has profits, offsetting those profits for tax purposes. The tax saving for the group comes from reducing the recipient’s taxable profits by the amount of the surrendered loss, with the saving equal to that amount multiplied by the recipient’s corporation tax rate. If the receiving entity pays a higher tax rate than the surrendering entity, shifting the loss to them reduces tax by a larger amount, which is why this is the reason for the relief. It isn’t about the surrendering entity expecting no profit, nor does it reduce both entities' tax by the same amount, and relief requires the receiving company to have profits to absorb the loss.

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