As someone who has worked in corporation tax for over two decades I have got used to clients grumbling about corporation tax compliance and in particular why we cannot use the same details for the accounts and corporation tax computations. There have been changes over the years to align the systems to an extent but the truth is that there are still some significant differences that result in additional administration and costs for UK companies. Could help now be at hand, in the shape of the Office of Tax Simplification’s (OTS) report on the simplification of the corporation tax computation?
The OTS’ stated aim is a corporation tax system that is easier to understand and engage with, resulting in reduced compliance costs. This follows their principle that the corporation tax computation should follow the accounts and commercial principles as far as possible, giving companies the certainty and stability that they are looking for. This can only be achieved if there is significant technical and administrative reform of the current rules. Here, though, caution kicks in; the OTS report recommends certain practical approaches but also acknowledges that feasibility and costing studies will be required before some of these can be implemented.
Even so, it is worth looking at some of the OTS’ recommendations, as these could indicate the direction of travel for corporation tax in future budgets.
A much simpler tax system for micro companies
The starting point for the smallest companies is the recommendation that companies filing FRS105 accounts should be taxed on their accounts profit, subject to a minimal number of essential adjustments. For these companies the principle should be “do it once”: prepare the accounts in line with FRS105 and the tax computation should follow with little or no adjustment.
There are also recommendations for the implementation of Making Tax Digital (MTD). Of course, we now know that this is on hold until 2020 for corporation tax purposes, but when it does go live the OTS recommends that MTD and iXBRL filing should be integrated into a single process, with no additional information provided beyond company law and accounting requirements unless there is clear justification.
Closer alignment between tax and accounts for all companies
It is not just the smallest companies that would benefit from the OTS’ recommendations. If these are implemented all corporation tax would be more closely aligned with acceptable accounting practices. The OTS sets out three areas in which this could apply:
Tax to follow the accounts definition of capital expenditure: This means that if an expense is charged to the profit and loss account it should be deductible for tax (e.g. legal fees). This could eventually lead to all business expenses that are revenue by nature being tax deductible.
Align the definitions of deductible expenses across trading, property and management activities: At present subtle differences between the treatment of specific costs of these three types of activity can cause uncertainty and additional compliance costs.
Where companies have different sources of income (e.g. from a trade, a rental property and investments) remove the requirement for each income stream to be treated separately for tax, with any losses being fully pooled: This would mean there would be only two sources of taxable profits or losses: “income” and “capital”.
The OTS does not stop with the profit and loss account. The next recommendation is an alignment between accounts depreciation and the tax deduction for fixed assets to replace the current system of capital allowances. For the companies themselves, this undoubtedly is the most straightforward approach that could be taken, but it does bring issues for the Treasury and HMRC, not least that it could mean extending tax deductions to buildings where no relief is currently available. There is also a lingering concern that companies could use depreciation rates to manipulate their tax deductions, although the OTS hopes that the current low rate of corporation tax reduces the incentive to do this. In addition, for most companies the benefits of reduced administration would be offset to some degree by the cashflow disadvantage of moving from an effective 100% first year allowance under the annual investment allowance to tax relief spread over a number of years.
In recognition of these factors, the OTS puts forward an alternative recommendation that the range of assets eligible for tax relief is extended to cover more categories of fixed assets. This would still require some further analysis of the accounts data as the OTS seems to anticipate different types of assets receiving relief at different rates (e.g. plant and machinery needing to be separated from buildings). For this reason, the OTS’ preference would be for the first option to be investigated in more detail first.
The way forward?
The OTS is recommending a common sense approach to reforming corporation tax compliance and it is likely that most, if not all, companies, would welcome reforms of this nature. As we know with tax, however, achieving simplification is not a simple process, particularly in the current climate. The issues arising from Brexit are going to dominate parliamentary business over the next two years at least, while the Treasury is still focussed on maintaining economic stability in uncertain times. Attractive as the OTS’ recommendations are, I suspect some at least (in particular, capital expenditure relief) will remain in the “too difficult” pile for a little while longer.
Whatever the questions you have about your company’s tax position the Ensors corporate tax team are here to provide advice and support.