Since the coalition government was formed, we have seen three emerging themes in company taxation
Firstly, there has been an increasingly hostile reaction to what is perceived to be aggressive tax avoidance. This has often been manipulated by commentators seeking, for largely dishonourable motives of their own, to damage the UK corporate sector by cascading misinformation; focussing on turnover rather than profit, accounting profit rather than taxable profit and multinational businesses in particular.
There has been an increasingly hostile reaction to what is perceived to be aggressive tax avoidance
I never thought that making too modest a margin upon turnover, claiming capital allowances and group relief could come to be regarded as ‘unacceptable tax avoidance’.
Secondly, the coalition government has rightly sought to remove the key tax disincentives for foreign direct investment in the UK in comparison with our European and Global competitors by, for example, reforming the taxation of controlled foreign companies, intellectual property and cross border financing.
Thirdly, the coalition government has a stated objective to reform and simplify business taxation generally. In our view, few will consider that the work started by, for example, the Office of Tax Simplification has as yet achieved sufficient traction.
As we enter 2013, there are a couple of ideas which seek to address the three business taxation themes referred to above. Neither of these could in any way (at least to authentic tax commentators!) be described as tax avoidance, be overly focussed upon the largest FTSE100 companies and global multinationals or introduce excessive complexity for any business enterprise.
Both ideas are suggested on the basis of an ‘opt-in’, so no business needs to fear an additional tax burden arising. Neither idea would cost the Exchequer significant tax revenue so that it needed to be dismissed whilst, understandably, the priority remains to eliminate the structural fiscal deficit.
Our first recommendation is that ‘middleweight companies’ (defined here as those with a group turnover of up to £250m), which are neither listed nor have a wide shareholder base, should be able to elect to be treated as tax transparent and thereby entirely remove the incidence of and need to consider corporation tax.
There is no satisfactory business or taxation reason why this is not permitted
This would be on the basis that the business profits are assessed to income tax upon the shareholders directly, as is the case with a partnership or limited liability partnership.
There is no satisfactory business or taxation reason why this is not permitted. Indeed, this treatment has been permitted in the USA for many years.
No doubt any business will, quite understandably and properly, wish to calculate the impact on the business and its shareholders. However, the removal of an entire level of taxation will be attractive to many despite the higher rates of income tax in comparison to the rate of corporation tax.
Our second recommendation is that all unlisted middleweight trading companies ought to be permitted to opt for the tax treatment currently restricted to UK listed real estate investment trusts. Very broadly, these companies would be required to distribute to their shareholders a fixed percentage, say 75%, of their UK-GAAP/IFRS accounting profits each year. These distributions would be paid net of a 20% withholding tax and subject to further income tax in the hands of higher rate shareholders.
If insufficient profits were distributed by the company, the shortfall would be subjected to corporation tax.
If this regime is acceptable for listed real estate investment trusts (and, in my experience, it has worked well since its introduction in 2007 with few, if any, real problems arising), why can the regime not be extended to other equally worthy UK companies?
I consider that both these reforms ought to be considered by HM Treasury for consultation following the Budget 2013 for enactment in the Finance Bill 2014, only if, of course, the consultation feedback is positive. I have written to HM Treasury making these suggestions and have, obviously, provided much fuller analyses of the background, the issues and the consequences for each proposal.
By way of a final point, I am grateful for valuable and helpful input I have received from the Policy Exchange, the CBI, the Institute of Directors, the Cobden Centre, the Taxpayers Alliance, the Chartered Institute of Taxation and, of course, my BDO tax colleagues.
Stephen Herring is senior tax partner at BDO
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