ACCA Advanced Taxation (ATX) Practice Exam

Which of the following statements regarding trading loss relief is true?

1. Overseas subsidiaries can utilize UK trading losses.

2. Overseas branches can relieve losses against UK profits if no exemption election is made.

3. All overseas entities are treated the same for trading loss relief.

4. UK profits cannot be offset by overseas branch losses.

The correct answer is: Overseas branches can relieve losses against UK profits if no exemption election is made.

The statement that overseas branches can relieve losses against UK profits if no exemption election is made is accurate. This is rooted in the principle that UK tax residents, including companies with overseas branches, can generally offset trading losses arising from their overseas branches against their UK profits. This offsets the losses against profits made in the UK, thereby reducing the taxable income and, consequently, the tax liability within the UK tax framework. In this context, it is important to note that if a company makes an exemption election, it chooses to exclude its overseas branch income from UK taxation, which would, in turn, disallow the relief of overseas branch losses against UK profits for that period. Therefore, not making such an election allows for the relief of those losses. The other statements do not hold true in the context of UK trading loss relief. For example, overseas subsidiaries do not have access to UK trading losses as they are treated separately from UK companies, while overseas entities are not categorized uniformly in tax laws, given the different implications for subsidiaries versus branches. Finally, while it is true that UK profits cannot be offset by losses from overseas branches if the election is made, they can be if no election is in place, reinforcing the accuracy of the correct statement.