Simplification of the corporation tax computation

17 December 2016

The OECD’s tax reforms and media interest in the tax affairs of multinationals has meant that international tax has grabbed many of the headlines recently. However, the OTS review focusses primarily on UK tax issues that cause undue complication for companies and their advisers.

It has identified key areas where simplification should be considered, including :

  • the many adjustments between accounting and corporation tax profit;
  • ways of relieving or incentivising capital expenditure;
  • the reform and potential removal of the ’Schedular’ system to merge the taxation of income streams;
  • how making tax digital can create opportunities for a simpler regime; and
  • drawing a distinction between small and large companies to facilitate making tax simpler for smaller companies (for example by extending cash accounting and removing many of the tax adjustments currently required), or streamlining tax processes for large companies.

We expand on three of these areas below.

Adjustments between accounting profit and corporation tax profit

In the Autumn Statement, the Chancellor reiterated the government’s commitment to reduce the corporation tax rate to 17 per cent. The OTS recognises that, with this reduction, the value of making adjustments between accounting and taxable profit is declining and perhaps some adjustments could be dispensed with. 

As the majority of corporation tax rules apply to all companies, from large multinationals to small one person companies , at the very least the system for smaller companies could be simplified . 

Incentivising capital expenditure

The OTS questions whether the current capital allowances regime incentivises spending by businesses or whether it provides relief for expenditure that would have been made anyway. Deducting the accounts depreciation figure may be simpler than the current regime; however removing the distinction between qualifying and non-qualifying assets would be required to provide most benefit under this option, which would admittedly come at a considerable cost to the Exchequer.

The view of many businesses is that they have become used to the capital allowances regime and perhaps the compromise is to consider simplifying the current regime rather than abolishing it altogether.

Merging the taxation of income streams

Including income and expenditure from trades, property investments and non-trade loan relationships in one stream of business income seems to be a desirable simplification . Tax losses would also be pooled. This is already partially considered under the new loss relief rule changes which come into effect from April 2017; however these rules will only apply to losses generated after this date. 

Extending these changes to historic losses could be the best option and would really simplify the regime. Again, the key concern here is that the cost to the Exchequer would be prohibitive. 

Conclusion

It is good to see that simplification of the corporation tax computation is considered desirable and there is a clear push by the OTS to determine those areas which would most benefit from reform. Unfortunately, the benefits of some of these reforms will need to be balanced with the resulting cost to the Exchequer.

Interested parties are invited to contribute their views by the end of 2016, with the OTS due to publish its final recommendations before Budget 2017.

The Chancellor referred to the complexity of UK tax code in the Autumn Statement and announced that he would hold just one major fiscal event each year from 2018. Steps were also taken in other areas (eg the alignment of employees’ and employers’ national insurance thresholds) to provide further simplification. However, many businesses still think that the government is not moving quickly enough to simplify the tax system and we hope that the OTS’ final recommendations will be properly considered for further action in the 2017 Budget.

For more information please get in touch with Michael Plant, or your usual RSM contact.