According to OTS chair Angela Knight, evidence shows that a company’s corporation tax figures often fall easily out of the accounts. “But when they do not and adjustments are needed to those accounting figures, this starts to add burdens – and often the analyses required can be extensive (for example, with capital allowances or testing for UK:UK transfer pricing).”
Consequently, for all but the very largest companies, and particularly for smaller ones, she says the simplest solution is that tax should follow the accounts, without adjustments being required.
The OTS has therefore come up with recommendations, based on conversations with a wide range of stakeholders and designed to develop a framework to improve the way the tax works and make it simpler for companies to cope. The OTS starts from the principle that the tax should follow the accounts. It argues that this not only offers companies the prospect of simpler procedures but it also reflects public opinion that accountants and tax should be closer together.
As far as the UK’s smallest companies are concerned, it proposes three key changes. The first is that micro companies that opt to use the simpler accounting principles (FRS 105) should be taxed on their accounting profit.
For those outside FRS 105, the OTS suggests simplifying the tax calculation by requiring only a minimum number of essential adjustments to accounting profit. It also thinks that this basic rule could be extended to other companies over time.
The third proposal is that optional cash accounting could be introduced for companies with a turnover under £150,000, along the lines of the regime for unincorporated businesses.
As far as Making Tax Digital (MTD) is concerned, no additional information should be required beyond what is demanded by GAAP and company law unless there is clear justification. This information should be reported digitally through a single account.
“We recognise that, however beneficial this may be, stripping away tax completely for small companies will necessarily create a different system and a boundary with larger and more complex companies,” the OTS says. “Consideration would need to be given to this and the impact of creating further tax disparities with unincorporated businesses. In addition, the needs of fast-growing companies will also need to be considered.”
During its research, the OTS listened to a range of ideas for aligning corporation tax for all companies more closely with their accounts. Three stood out, it says: using the accounting definition of capital expenditure for tax purposes; bringing the definitions of trading and property deductions and management expenses together to remove the complication of having two sets of very similar rules; and for companies with different sources of income, bringing these together into one business profit or loss for tax purposes, with losses fully pooled.
Although it realises that there would be a cost to the exchequer, these would be “modest” and “the simplification dividend significant”. So it recommends the reforms should be adopted “to better align the tax system with the accounts and modern commercial reality”.
Commentators also told the OTS that the rules on asset recognition and categorisation for capital allowance purposes are both complex and burdensome. The OTS has looked at the possible ways to simplify the rules and come up with its preferred route which is the “follow the accounts” principle.
Although it admits that this route hides a lot of complexities (for example, transitional arrangements) and concerns (like costs), it offers the best scope for significant simplification, the OTS believes. It suggests replacing capital allowances with a tax deduction for accounts depreciation, which would align tax with the accounts and remove the need for separate calculations.
As for large companies and corporation tax, the OTS says that it must be a priority to address their need for stability and certainty if the UK’s attractiveness as a place for investment and doing business is to be enhanced.
The government should ensure that it introduces earlier and more open consultation and a commitment to sufficient lead times for changes, while HMRC must make clear the role of the customer relationship manager, including their responsibility for risk management and helping businesses with achieving certainty.
But there are also simplification measures than can be taken to ease the large companies’ compliance burden, particularly in the areas of UK:UK transfer pricing, intangibles and anti-avoidance legislation generally.
The OTS knows its recommendations for reform are not “quick wins” although some could be acted on relatively swiftly. But they do herald a much needed and “significant revamp” of corporation tax.
“The report,” it says, “recognises that more work will need to be done in areas such as costings, impacts and transitions, but sees the potential gains as significant.”
It sets out a draft five-year corporation tax roadmap to work alongside the business tax roadmap, highlighting the seven ideas it thinks are most important and that will make the greatest difference. And it adds a further 25 possibilities for action that it believes would also make an important contribution.