MTT25100 - Calculating the effective tax rate: Covered tax balance: Covered taxes

A tax is a covered tax in relation to a member if it is:

  • a tax on profits of that member,
  • a tax imposed on the member under an eligible distribution tax system,
  • a tax imposed on the member as a substitute for a tax on profits that generally applies in the territory in which the tax is imposed, or
  • a tax charged by reference to the capital of the company (or in reference to a combination of its capital and its profits).

A tax is considered to be a tax on the profits of a member where:

  • that member has a direct or indirect ownership interest in another member of its group, and
  • the tax is charged on that member on its share of the income or profits of the other member.

See MTT17030 for guidance on ownership interests.

This is set out in section 173 of Finance (No.2) Act 2023.

Taxes that are not covered

A tax will not be a covered tax if it is:

  • Multinational Top-up Tax or an equivalent (see MTT09970),
  • a QDMTT (see MTT09970),
  • a qualifying undertaxed profits tax,
  • a disqualified refundable imputation tax (see MTT25230), or
  • where the member carries on a life insurance business, a tax in respect of which amounts are charged to the member’s policyholders.

Domestic Top-up Tax – payments for group relief

For Domestic Top-up Tax purposes only, a payment for group relief is also a covered tax in relation to a member subject to the following rules:

  • the amount of the payment which constitutes a covered tax is capped at the lower of 15% of the acquired deductible loss and the amount of the payment. Any amount exceeding 15% is excluded.
  • where a payment for group relief constitutes a covered tax in the hands of the payer, the receiver should recognise an equivalent negative covered tax amount.
  • this rule applies for payments made for group relief and group relief carried forward in relation to a claim under section 130 or 188CB CTA 2010 by virtue of the group condition (see section 131 and 188CE CTA 2010) being met. Therefore, this treatment for payments for group relief does not apply to consortium relief.

As this rule does not apply to consortium relief, it will generally only affect the allocation of Domestic Top-up Tax between members of a blending sub-group.

However, under certain circumstances group relief can be surrendered and received between two UK entities in relation to profits and losses of their foreign permanent establishments. Where this is the case, the following will apply:

  • In the case of a loss surrendered from the UK member to a foreign permanent establishment the receipt of payment will reduce covered taxes of the UK member while the payer will be outside of UK Domestic Top-up Tax.
  • In the case of a loss surrendered from a foreign permanent establishment to the UK member, the UK member making the payment will see an increase in covered taxes while the receiver of the payment will likely have their losses (and future profits up to the amount of the loss) attributed to their main entity and as such will also attribute the reduction in covered taxes to the main entity (see MTT41030 and MTT4140).

Often, a permanent establishment of a UK entity has made a branch exemption election and so these rules will not apply to it. However, where this is not the case, HMRC will accept a just and reasonable determination of which profits or losses (permanent establishment or main entity) are being affected by the group relief. A just and reasonable determination should consider the nature of the claim for group relief or group relief carried forward as well as the guidance in MTT41040.