ICAS responds to recent tax consultations
Susan Cattell outlines the ICAS response to a recent consultation and ICAS comments on an HMRC technical note.
Corporate Capital Loss Restriction
In Budget 2018, the government announced that the restriction of relief for the losses of large corporates, introduced from April 2017 for income losses, would be extended to cover capital losses.
A consultation on the delivery of the restriction was published on Budget day.
The consultation proposed that:
- From 1 April 2020, the amount of capital gains that can be relieved by carried forward capital losses will be restricted to 50%.
- The allowance of £5 million per group that was introduced for the corporate income loss restriction (CILR) will also cover capital gains that can be offset with carried-forward capital losses.
In its response to the consultation ICAS raised several issues and concerns:
- ICAS supports the principle that relief for carried-forward losses is an important feature of the tax system, ensuring that the tax paid by a company is reflective of its profit over the long term. CILR has already undermined this principle.
- ICAS cannot see any justification for extending the restriction on loss relief to capital losses. Many large companies, particularly trading companies (which tend to have infrequent significant chargeable capital gains) already find that it takes a long time to use capital losses.
- Chargeable gains also depend on market effects and (following the withdrawal of indexation allowance) increasingly on inflation – they are not necessarily related to the existence (or otherwise) of “substantial annual profits”.
- The change will add further unwelcome complexity to corporate tax calculations, particularly for large, economically significant companies. ICAS remains concerned that the ongoing reductions in the corporation tax rate are being pursued at the expense of certainty and stability.
- Whilst over 99% of companies are forecast to be financially unaffected by the restriction due to the £5 million allowance, it is unhelpful that all companies, regardless of size, are likely to be affected by the compliance requirements (if they want to claim relief for carried forward losses) – unless those requirements (introduced with CILR) are amended.
Capital allowances for structures and buildings: HMRC Technical Note
One of the more surprising announcements in the 2018 Budget was the introduction (from 29 October 2018) of a new capital allowance for structures and buildings (SBA) intended to encourage investment in new structures and buildings and the improvement of existing ones.
ICAS has broadly welcomed the proposed new allowance and commented on some aspects of the proposals (which were set out in a Technical Note published on Budget day).
Proposed key features of the SBA are:
- A 2% writing down allowance at a flat rate over a 50 year period;
- relief for new commercial structures and buildings (including costs for new conversions or renovations);
- no balancing charges/allowances: a purchaser will continue to claim the annual allowance of 2% of original cost;
- land costs will not qualify for SBA;
- SBA expenditure will not qualify for AIA.
ICAS raised a number of issues in its response:
- SBA is being introduced without the normal five-stage approach to policy development and consultation and through secondary legislation. This increases the risk that poor legislation, which causes problems for businesses and does not meet government objectives, may be the result.
- ICAS does not believe that secondary legislation should be used to implement tax changes, such as the SBA, because it lacks both visibility and proper parliamentary consideration.
- ICAS recognises that the government was keen to provide certainty that the SBA would come into force as soon as possible but we hope that rushed implementation of tax changes will not become the normal approach.
- The administrative requirements associated with the SBA will be onerous in some cases, particularly where the initial expenditure on a building or structure is incurred by the Crown or another person not within the charge to UK tax. This could undermine take up.
- The ICAS response suggests a possible simplification in relation to integral features and fixtures.
- The proposed 2% rate for SBA involves a cost write-off over 50 years. However, some structures, for example, some used in the provision of alternative energy, have a useful economic life of only 25 years. The ICAS response makes some suggestions to address this issue.
- Expenditure on residential property/dwellings will be excluded from the SBA but the definition of residential property has not yet been decided. ICAS supports the Office of Tax Simplification suggestion that it would be helpful if definitions were consistent across tax legislation, wherever possible.
- There are already several different definitions of residential property/dwellings in different parts of the tax legislation. In the interests of simplification – and to help users – it would be sensible if the definition used for SBA could be the same as one of the other definitions. Creating another different definition would add to the complexity and increase the scope for errors.
Details of current consultations on tax issues can be found here:
Let us know what you think
The ICAS tax team welcomes members’ views on current tax consultations to assist in preparing ICAS responses