ACCA Advanced Taxation (ATX) Practice Exam

Which of the following statements about the maximum loss claimable by group companies is true?

1. It is unlimited based on profits

2. It is dependent on future earning potential

3. It cannot exceed their taxable total profits for the relevant period

4. It is subject to an arbitrary percentage limit

The correct answer is: It cannot exceed their taxable total profits for the relevant period

The statement that the maximum loss claimable by group companies cannot exceed their taxable total profits for the relevant period is accurate. In the context of group relief for corporation tax, losses incurred by one company within a group can be offset against the profits of another group company. However, this relief is limited to the extent of the taxable profits of the company that is making the claim. This ensures that loss relief is only available to the extent that there are profits available to offset, preventing companies from claiming more losses than they actually have profits to utilize against. Consequently, the relief mechanism is designed to ensure that the losses are matched appropriately with the profits, adhering to the principle that loss relief should not exceed the taxable profits of the claimant. The other options suggest excessive or indefinite loss claims, which are not aligned with tax regulations that govern group relief mechanisms. Losses must always have a corresponding profit for relief to be effectively claimed, adhering to the principles of taxation fairness and accuracy.