ACCA Advanced Taxation (ATX) Practice Exam

Can brought forward capital losses be reallocated in a losses or gains group?

1. Yes, for both trading and capital losses

2. No, they must be carried forward for future use

3. Yes, but only for capital losses

4. No, but trading losses can be reallocated

The correct answer is: No, but trading losses can be reallocated

The appropriate choice indicates that trading losses can be reallocated within a group of companies, while capital losses cannot. In the context of corporate taxation, group relief provisions allow companies within a group to offset trading losses against the profits of other group members, thereby reducing the overall tax liability. Trading losses are considered more flexible in terms of sharing among group companies, which is why they can be reallocated freely to benefit other entities within the group structure. This mechanism is intended to support the continuity and viability of businesses within corporate groups, enabling effective tax planning. On the other hand, capital losses are governed by stricter regulations. They must be carried forward and cannot be redistributed among the profits of group companies during the fiscal year. This limitation reflects the distinct nature of capital and trading activities, with capital losses primarily functioning within the confines of individual companies' tax computations and requiring future gains to utilize. Thus, the focus on the reallocation of trading losses while maintaining the necessity for capital losses to be kept within the individual company aligns with the respective tax treatment of these types of losses under current tax legislation.