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Streamlining corporation tax

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The Office of Tax Simplification (OTS) has been asked by ministers to carry out a review of the corporation tax computation. The work will look at the adjustments to get from accounting profit to taxable profit in the context of the current business environment, building on earlier OTS work; in particular, our competitiveness report. As always, the OTS wants views and evidence from businesses and advisers, including on its new strategy document. 

Simplifying corporation tax is an obvious task for the OTS and one we have spent a deal of time on already. Our review Competitiveness of UK tax administration (see showed that there was plenty of scope to streamline the computation; and our recent Small company taxation review (see returned to the theme.
The government accepted our findings and agreed to consider the ideas we put forward. In effect, it has now put the ball back into the OTS’s court and invited us to go further, asking us to carry out a formal and potentially wide-ranging review of the corporation tax computation, mindful of the digital agenda. The terms of reference were published on 12 May (see
We see the new review as similar in style to our continuing income tax/NICs work. In both cases, it is accepted that reform is a Good Idea. This is, in OTS terminology, a ‘Stage 2’ project: the case has been made that change is worth looking at seriously, so we move on to the next level of detail and to ‘the how’ – and the implications. More detailed options are needed, along with analysis of the implications: costs and benefits, both technical and administrative; transitional aspects; and the sheer practicality of reform. 

What are we looking at?

The new, statutory remit of the OTS encourages us to look forward, not just testing whether existing rules and procedures can be simplified. In addition – arguably as the overriding purpose – we will be assessing and opening up discussion about whether the system works for the way business is conducted today, and indeed tomorrow. Is the computation really fit for the 21st century?
This approach obviously leads us to the rump of the old schedular system, not least the divide between trading and management income and expenses. Companies usually see all their activities as ‘business’: why doesn’t the tax computation parallel this? One divide that we do need to maintain is that between revenue and capital, but even here we will be testing whether the rules can be simplified. 
Or, indeed, is it possible to reduce radically the work involved in dealing with corporate capital gains? In previous reports, we have shown that thanks to reliefs such as rollover and substantial shareholdings exemption, little tax is paid on corporate capital gains. Is there a simpler route that would more easily identify a measure of the gains that need to be taxed, instead of having to do huge amounts of work on all gains and concluding that almost all don’t need to be taxed?
Then there are the routine – and not so routine – adjustments to accounting profit to arrive at the taxable profit. There is general agreement that moving taxable profit closer to accounting profit would be simpler. So which adjustments are really needed? The OTS has previously pointed out that the ‘value’ of many adjustments is significantly reduced with a tax rate of 20% (and going down to 17%), compared with the 30+% (and even 52%) many will recall. This is hardly a devastating insight – or is it? It does allow us to question whether these adjustments are ‘worth it’, given the administrative burden created. 
More significantly, what of the perennial question of capital allowances versus depreciation? Simplification would indicate a move to allowing depreciation. As our competitiveness report showed, the ‘accelerated value’ of capital allowances is much reduced these days (and so, potentially, is the cost of widening the scope of deductions). Is it really worth continuing with the system? Such a move does, I know, worry utility businesses and others who make significant investment in plant, so we’ll need to engage carefully with them to really understand the implications of any change. 
Then some might worry about avoidance caused by rapid write off of purchases – but isn’t that what the annual investment allowance (AIA) allows? More will be concerned about the continuation of the AIA – but could we have a two-tier system that allows smaller companies to use the AIA and larger ones to have a simpler depreciation route?
Those who recall the Budget announcement about reforms to loss reliefs will be aware that there are plans to make loss offsets more flexible. This will come with some restrictions, with a 50% cap to offsets for larger companies. There will be consultation on those reforms and that will be the route to debate how they will work, but we see these changes as helpful in the context of our work as they open up new possibilities.

What will we be doing?

The OTS will be embarking on our usual process of evidence gathering in due course. We will want to hear views, especially on the implications of possible routes to reforms.
However, as this is a Stage 2 project, with a direction of travel established from the start, we want to do a certain amount of research and analysis first, to make sure we end up discussing the right issues. We will be working with HMRC’s Knowledge, Analysis and Intelligence (KAI) team on statistical analysis to help assess the real scope of possible changes, including the revenue implications.
And we are recruiting some people to help us do the work. Some will have seen our advertisement (and thanks to Tax Journal for drawing attention to it). David Halsey, our new head of office, will be bringing his previous experience as an HMRC CRM to bear on the project; and Angela Brown, also on loan to us from HMRC, will be project managing the work. We hope to have three private sector people in place soon to work with them.

How can I contribute? 

As always, we want to gather views and evidence. Feel free to write to us or to suggest a meeting. We will probably be developing a survey to gather more information and plan to publish an interim paper in the autumn. Our final report is planned for February 2017.
We will keep Tax Journal readers posted; but, in the meantime, drop us a line to I promise you that all contributions are carefully considered.