Will corporation tax be simplified?

business road
Donald-Drysdale By Donald Drysdale for ICAS

24 November 2016

The OTS is examining a range of suggestions for simplifying companies’ corporation tax computations, as Donald Drysdale explains.

Focus on the CT computation

UK corporation tax (CT) has been in a state of flux for many years. For companies carrying on business in the UK or considering doing so, it is scarcely a surprise to discover that the CT rules, already complex, may be about to change further. If such changes bring genuine simplification they should be welcomed.

Philip Hammond’s Autumn Statement has confirmed that the corporation tax rate will fall to 17% by April 2020, as planned. He has also confirmed a number of other corporation tax changes mainly of relevance to larger companies. He has also hinted, somewhat ominously for small companies, that a review of incorporation is needed to ensure that the tax treatment of different ways of working is fair between different individuals.

The Office of Tax Simplification (OTS) recently published a progress report on Simplification of the corporation tax computation with supporting papers. In this project the OTS is assessing what companies, large or small, find difficult or time consuming about CT.

CT applies to some 2 million companies ranging from large multinationals to small one-person companies. Relatively few companies are affected by specialist cross-border issues. The project concentrates instead on the ‘bread and butter’ of CT as it affects every company, large or small, and asks whether the way the computation works is ‘fit for purpose’ for the generality of companies, bearing in mind changing work and business patterns.

Based on earlier work by the OTS, the starting point for the review is that simplification of the CT computation is desirable. The aim is to identify policies and processes that could be simplified, and the benefits this might create for companies, HMRC and the Exchequer.

Emerging themes

Based on discussions to date with businesses, their advisers and representatives, and with HMRC and HM Treasury, the OTS has identified a number of themes that appear ripe for reform, either in the short term or (in some cases) over a longer period.

Tax adjustments: Adjustments to the accounting profit to arrive at the CT profit have accumulated piecemeal over 150 years. These adjustments ought to reflect clear and well understood policies, be relevant to a modern business, and add material value either for the business or the Exchequer. They should be simple to administer in proportion to the complexity of the business.

Capital allowances: How should capital expenditure be relieved or incentivised? The origins of the current capital allowances regime can be traced back to 1878. However, the rationale for today’s allowances is unclear, and frequent tinkering of rates and rules by government adds complexity and uncertainty. Alternatives should be considered, including the possibility of allowing a tax deduction for accounts depreciation.

The ‘schedular’ system: This dates from 1803 and seems increasingly out of tune with modern businesses, many of which see everything they do as part of one overall enterprise. There are calls for reform in this area – to merge the tax treatment of different income streams. This could include considering whether the distinction between trading and investment companies is still relevant, and a review of the limited extent to which CT is paid on chargeable gains of companies.

Making Tax Digital: Although HMRC released six consultation documents and an overview paper in August, covering many aspects of MTD, these focussed on unincorporated businesses. HMRC intend to publish a separate document on MTD for companies and complex businesses. The OTS is keen to identify what simplifications might be made to the CT computation processes, alongside MTD, to support its implementation.

CT administration: Record-keeping, data-gathering and reporting for CT purposes impose specific burdens on companies, made more onerous because the concept of materiality which applies for accounting purposes does not apply for tax. The OTS is considering what simplification might be feasible. Particular concerns have been expressed about the administrative burdens of iXBRL, and the fact that tax agents are unable to access HMRC’s free CT online software.

Small and less complex companies: It might help small companies to have a regime exempting them from many of the more complex adjustments (for example loan relationships or intangibles), perhaps allowing them to claim or be subject to only a small number of reliefs and adjustments such as annual investment allowance or research and development reliefs. An optional cash basis similar to that available to unincorporated businesses might be feasible for the smallest companies. Where possible, distortions between the tax treatment of small companies and unincorporated businesses should be reduced.

Large and complex companies: Such companies face a range of difficulties not encountered in the CT computations of smaller concerns. These include matters such as timing differences, UK-to-UK transfer pricing, and long term tracking of large numbers of individual items (for example, intangibles, indexation, financial instruments, cars, short life assets, and base costs of assets for capital gains purposes). Group relief administration might be improved, and there are mixed views on whether an aggregate group CT return might be a good idea. The surplus advance corporation tax regime might be reformed as it is of diminishing relevance.

More about tax adjustments

The supporting papers released by the OTS, alongside its progress report, contain information on adjustments that may be encountered in CT computations.

There is a summary list in broad categories with a brief explanation, a summary table of 70 adjustments identified as relatively common or important, and a comprehensive table of some 430 adjustments or relevant provisions taken into account in drawing up the table of 70 common adjustments.

Each table includes some columns indicating, for example, which of the adjustments are likely to matter to most companies, or which could be affected by schedular reform.

A chance to influence  

The OTS progress report is also a call for evidence. It invites contributions to this review, and ICAS plans to respond by 22 December. Please take time to consider the themes and questions posed in the consultation paper and email your views to tax@icas.com.

Alternatively, responses may be submitted direct to the OTS by 31 December, either by email at ots@ots.gsi.gov.uk or through their survey forms for businesses or professional advisers.

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