The Office of Tax Simplification (OTS) has published its report on simplifying corporation tax: it contains some fairly radical proposals but suggests a five year roadmap for implementation.
The report covers the whole spectrum of corporation tax payers and makes numerous recommendations to simplify computations for micro businesses. However, it is the broader proposals for all companies that take more radical steps towards aligning corporation tax to accounting profit. For example, on business expenses, it suggests:
- Income from different sources should all be treated as business profits (with full pooling of losses) – effectively abolishing the longstanding schedular system of taxation
- Replacing capital allowances with a tax deduction for depreciation in the accounts
- Removing the distinctions between trading and property deductions and management expenses
- Using the narrower accounting definition of capital expenditure (ie costs incurred in creating an asset) so that fewer small adjustments/apportionments are needed for costs such as professional fees
- Creating a £1,000 de minimis level for capital items (smaller expenses would simply go through the profit and loss account).
It is heartening that the OTS has addressed practical issues and many of its proposals consider the impact of future quarterly returns under Making Tax Digital. Helpfully it suggests aligning quarterly returns with iXBRL reporting so that there is no duplication – although it is hoped that fully automated tagging will become the norm before all quarterly returns have to be tagged!
Specific simplification proposals that would benefit large companies include:
- Only applying the UK:UK transfer pricing requirements where an actual tax difference would otherwise be created
- Treating all goodwill acquired after 2002 (and related enhancement costs) as relievable under the income tax rules, ie not as capital base costs
- Changing the deferred remuneration rules to allow deductions for all remuneration charged to the profit and loss account (regardless of when paid)
- Simplifying the surplus ACT rules for the few companies that can still claim it
- Harmonising de minimis exemptions and motive tests for all corporate anti-avoidance legislation
- Allowing groups to volunteer to make aggregated group returns
- Digitising group relief claims and allocation
- Allowing a company or group’s Customer Relationship Manager at HMRC to formally take materiality into account (at a set de minimis level) when reviewing corporation tax computations – to limit the instance of minor adjustments.
Much more work required
The OTS recognises that much more work is required both to establish the revenue implications of its proposals (many will not be revenue neutral) and implement the changes smoothly. Its five year roadmap would seem eminently sensible in normal times. However, the impact of Brexit on the Government’s priorities may either create practical delays or lead to the changes being fast-tracked if it sees simplified corporate tax rules as an important competitive advantage for post-Brexit Britain. Either way, it would be highly surprising if these reforms did not feature in the Chancellor’s Autumn Budget speech.
You can read the full OTS report at here.
For help and advice on streamlining your corporation tax processes and administration please contact Jon Hickman.