Earlier this month the Office for Tax Simplification (OTS) released a report reviewing the UK’s corporation tax system, providing recommendations to make corporation tax simpler and less costly to comply with. The report suggests a wide range of reforms, both technical and administrative.
While some of the suggestions can be enacted in the short term, others that are deeper structural changes will have to be implemented over a period of time, and may in fact need transitional arrangements. OTS thus recommends the government create a five year roadmap for CT reform that would align with MTD.
Tax should follow the accounts
The key point across all reforms is that tax should follow accounts, with a minimum number of adjustments required.
Probing the vast difference in opinion on the simplicity of tax, OTS points to the fact that while a company’s corporation tax figures often fall easily out of the accounts, sometimes they do not and therefore require adjustments to be made. At this point burdens begin piling up and often extensive analysis is required, such as with capital allowances or testing for UK:UK transfer pricing.
Smallest companies
The report looks at large and small corporations separately and makes a distinct set of recommendations for both.
Looking at micro-companies in particular, OTS recommends a much simpler tax system to align with their simpler accounting requirements. The goal is to simply the system to give smaller companies the option to do their own tax returns if they wish.
In order to achieve this, OTS recommends that micro-companies who opt to use simpler accounting principles (FRS105) should be taxed on their accounting profit. For those outside FRS105, the calculation of tax should require a minimum number of essential adjustments to accounting profit.
Largest companies
For the largest companies the priority was ensuring stability and certainty in the tax system. OTS proposes two measures to achieve this. Firstly, open consultation as part of a five year corporation tax roadmap alongside the Business Tax Roadmap.
Secondly, they suggest embedding the role of Customer Relationship Manager (CRM) in line with HMRC’s Large Business Strategy and the Framework for Cooperative Compliance, to help businesses achieve certainty and to carry out risk management.
For all companies
Overall the primary goal for all companies is aligning corporation tax more closely with accounts, and the report outlines measures to accomplish this for all companies.
The first recommendation is using the accounting definition of capital expenditure for tax purposes, essentially creating an asset. This would save time on identifying small tax adjustments, as it would mean valid business expenses taken to the profit and loss account would be deductible for tax purposes (e.g. capital elements of legal and professional fees). It would also encourage businesses to make more innovative moves as it would provide some relief for costs incurred during fruitless new ventures.
Secondly, OTS recommends bringing together definitions of trading and property deductions and management expenses. The current system can cause confusion as the two have very similar sets of rules. OTS goes on to suggest that in time extending relief to all business expenditure of an income nature should be considered.
The final recommendation for all companies is that of ‘schedular reform’, which would see the scheduler system for income abolished. Instead, companies with multiple sources of income should bring them together into one business profit or loss for tax purposes, with losses fully pooled.
Capital investment
Presently, companies do not get tax relief if their assets depreciate, but may get capital allowances (CAs). However, not all assets qualify for CAs and the rate of relief does not align with the rate of depreciation in the accounts. The report recognises that often rules surrounding CAs are excessively complex and create burdens.
OTS’ key recommendation in relation to this is born out of the principle that tax should follow accounts, and so they suggest replacing CAs with a tax deduction for accounts depreciation. In the report OTS recognises that this measure conceals a host of complexities, but remains confident that it is the best route forward.
Conclusion
OTS’ report presents a wide range of reforms to simplify the corporation tax system in the UK, underpinned by the goal to align tax and accounts more closely. Central to the report is the suggestion to create a five year corporation tax roadmap, that would take into account this range of reforms and how they may be implemented long term.
OTS recognises that suggestions in the report may be complicated to implement, particularly ones that require structural changes, and may come with exchequer costs, but believes these changes and costs would be modest in exchange for a simpler and clearer tax system.
Last week, the government confirmed that Making Tax Digital is to be delayed to 2020 at the earliest for taxes other than VAT.