OTS pushes for simpler corporation tax regime

The Office of Tax Simplification (OTS) has published a range of recommendations for overhauling the corporation tax regime for both small and large businesses, with the aim of making calculations simpler, including fewer changes and more time to plan

The independent adviser says its review found that where a company’s corporation tax figures fell easily out of the accounts, which a company has to prepare anyway, it was regarded as easy to administer. But when they do not and adjustments are needed to the accounting figures, companies reported significant additional burdens, particularly where the analysis was extensive, for example with capital allowances or testing for UK:UK transfer pricing.

The report states: ‘The conclusion the OTS has been drawn to is that for all but the very largest companies, and particularly for smaller ones, the simplest solution is surely that tax should follow the accounts, without adjustments being required.’

The OTS considered four broad themes: simpler tax for smaller companies; aligning the tax rules more closely with accounting rules where appropriate; simplifying tax relief for capital investment; and a range of further issues affecting the largest companies.

The report also highlights the links with HMRC’s work on Making Tax Digital, which the OTS says offers a real impetus to move towards a simpler system by use of technology.

Angela Knight, chair of the OTS board, said: ‘Despite the attention corporation tax has received in recent years, in particular regarding multinationals, there has been little focus on making the tax simpler.

‘In response to a clamour from companies of all sizes and types, the main recommendation is that the government should develop a clear and coherent roadmap for corporation tax simplification to give certainty for all companies.’

For the very smallest companies, the OTS recommends the use of the accounting profit prepared under accounting standard FRS 105 as the taxable profit without any adjustments.

For micro-companies outside FRS 105, the tax calculation should be simplified to require only a minimum number of essential adjustments to accounting profit, with the OTS proposing a set list of five or six potential tax adjustments. This could be extended to more companies over time, and the OTS says that in the future, optional cash accounting could be introduced for companies with a turnover under £150,000.

As regards Making Tax Digital, especially for small companies, the OTS suggests that as a principle no additional information needs to be provided beyond that already required by GAAP and company law, without clear justification, and that this information is reported digitally to government through a single account. It wants Making Tax Digital and iXBRL reporting to be integrated into a single process (assuming iXBRL is still necessary), to avoid creating an additional burden.

In addition the OTS is calling for the tax definition of capital and revenue to be more closely aligned to the accounts definitions, and for the rules for trading and management expenses to be aligned.

The agency also wants the 19th century schedular system (under which different types of income are calculated separately subject to slightly different rules) to be replaced with a ‘whole business’ approach, which it says is in line with most other countries.

For large companies, the OTS wants improvements to be made in a number of technical areas, in the context of promoting stability and certainty in the corporation tax system. It highlights the need for earlier, more open, consultation as part of a coherent five year corporation tax roadmap, and a commitment to sufficient lead times for changes, and wants the role of the customer relationship manager to be consistently communicated and embedded.

The OTS is looking to undertake further work on capital expenditure to explore the issues involved in replacing the present capital allowances system with an accounts depreciation approach, recognising the need to consider the impacts on particular industry sectors and the likely requirement for a transitional period.

Paul Morton, OTS tax director, said: ‘A simpler approach would be to align the tax more closely with a company’s accounts, making it more intuitive, reducing compliance costs and saving time. This is particularly attractive for smaller incorporated businesses, which represent the overwhelming majority of companies.’

The OTS report, Simplification of the corporation tax computation, is here.

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