Corporation Tax Reform
Comments from ACCA
February 2005
We thank you for the opportunity to comment. We have participated in the treasury meetings to discuss the various aspects of the proposals including the meeting which was arranged to discuss the small business related issues. Our comments do not attempt to cover all aspects of the fairly length and detailed consultation document but instead attempts to be focused and concise.
Our comments follow the same order as the consultation paper itself:
CHAPTER 2 SCHEDULAR REFORM
2.4 We consider that schedular reform needs to lead to simplification as well as equity within the tax system so that the ¿whole business' is tax as a single economic entity. We agree that any system for dealing with pre commencement losses should be flexible and simple. However, this should not be at the cost of losing losses that the entity has made. Being in business is hard enough for SME's without removing reliefs to which they should be entitled.
The Government has made SME's a target for valuable relief such as R&D tax credits and exclusion from the onshore transfer pricing regime and we consider that a special case can be made for a more targeted approach enabling SME's to retain their losses in this reform.
2.10 There has been considerable discussion regarding the tax avoidance industry and all should pay the ¿right amount of tax amount of tax¿ on what they earn. The Government seems to be suggesting that this only works one way. In this paragraph they seem to suggest that given the potentially high exchequer impact that proper relief for losses can be ignored, this is plainly not fair.
2.46 Pooling of the different types of trades that a company may carry on together with letting income will lead to significant compliance savings. There would no longer be the need to stream trades for the purposes of loss relief where trades have been transferred under S343 ICTA 1988. In group situations this can happen quite frequently. The need to separate letting and trading expenses will no longer be required.
2.47 We believe that the idea of starting with the companies overall profit and then carving out the items that are not within the ambit is likely to be the simplest way of achieving the final position of an operating business source. Although we were intrigued by the reference at Para 2.18 to ¿most dividends¿. The other way is to build up the final figure through separate parts of the legislation. This seems to us to be more complex.
2.48 We would have thought the position with loan relationships was now well established. The test for what is trading is well known. However, non-trading loan relationships do offer flexible carry forward rules for deficits, in particular against capital gains (it is appreciated that the treatment of these is also under discussion). This flexibility should be maintained.
2.49 No comment.
2.50 The provisions for in year loss relief seem reasonable. The Government aim is to simplify tax for corporate entities and have looked seriously at how to bring capital gains into the income regime, indeed the technical note includes more proposals to enable this to be achieved. Therefore, why continue to prevent losses from an operating business being used against capital gains? Even without this simplification for all businesses there is a case to provide for the use of losses in this way for SME's at the very least. This type of approach with losses is used in non-trading loan relationships. Restricting the more flexible loss relief to SMEs should negate Government's fear of mass tax avoidance. We note there is again a reference to businesses paying their fair share. What is fair about not allowing loss relief against other types of profit?
The loss buying rules will need to be considered further if such flexibility were allowed.
2.51 Pre-commencement losses should be available to be utilised by a business. Given the Exchequer cost where the losses have been built up over a number of years a phased system of relief over say 10 years could be used. Where the losses have arisen more recently, in the last say 2 years, then why not allow immediate relief against the first available operating profits.
2.52 We leave comment in this area to the specialists in the field.
2.53 The loss buying rules already work well there will need to be some amendments to deal with the change in definitions but in general the rules should provide a very good way of preventing such behaviour for avoidance purposes while allowing the commercial activities of expansion by acquisition to continue.
2.54 The current rules are well established and should enable companies to know what exposure they run when buying a company with losses where they change the nature of the activities.
2.55 We leave comment in this area to the specialists in the field.
2.56 The proposal to reclassify charges as operating expenses is useful.
CHAPTER 3 CAPITAL ASSETS
3.48 The proposal to utilise the capital allowances rules to tax capital gains is interesting and is worth exploring further. The concerns that need to be addressed would include indexation, especially that accrued up to the date of the changeover. In the last few years the year on year indexation increase has been relatively low and if circumstances remain similar then the ongoing loss of indexation may not be so much of a problem. If the inflation landscape changed then we would wish to see indexation restored. The taxation of capital profits should be by way of an adjustment to the balance going forward in the pool, rather than by way of balancing adjustment. If the latter is chosen then it seems that we would be effectively in the same position as with CGT but without indexation.
3.49 From our experience the average SME does not usually sell plant at a sum above original cost. In the few cases where it might happen then being able to put the entire proceeds through the pool would be useful in that there would be a deferral of tax on the gain against the brought forward balance. This would be desirable.
3.50 There is currently the ability to defer CGT on fixed plant by means of rollover relief. This should be maintained within any new system.
3.51 Certainly the ability to transfer assets around a group at no gain/no loss should continue. However, in a pooling arrangement this would be more difficult as by definition there would be no separate records maintained on each individual item of plant within the pool. There would need to be a mechanism to allow companies in the same group to fix the level of consideration for the transfer of assets at a sum that was tax neutral, by means of a joint election.
3.52 Extending relief on buildings from purely industrial buildings to all commercial buildings would be welcome to provide relief for all business related expenditure.
Pooling the expenditure would save compliance costs. However, as stated above, moving from a system where there is an allowance for indexation to one where there is no such allowance is going to require transitional provisions. There should be an adjustment to the amount brought into the pool for any existing assets that the new rules would apply to so that the indexation accrued up to date can be brought in. Although indexation is currently at a relatively low ongoing level a way of offsetting the disadvantage of losing indexation would be to increase the level of allowance for buildings from the current 4% to say 6%-8%. This will obviously not provide additional relief in the same way that indexation does but by accelerating relief for the expenditure there will be a cash flow benefit.
There is no case to be made for including plant and machinery as part of the building. Case law has developed the meaning of plant and currently for SME's provides relief at 40% for FYA's and 25% thereafter.
3.53 The definition should be ¿any building used for the purposes of generating income that is assessed to tax as being from an operating business source'. This would enable the matching of income that is taxed to the expenditure generating that income.
3.54 The transition can be handled by providing indexation up to the date of the new legislation and bring the total into the pool at that point on which allowances will be claimed. Plant and machinery within a building should be kept separate from the buildings pool. There is the possibility that by the time the building is sold that a loss would be created based on original cost. This scenario would under the capital gains rules be one that indexation would not be allowed on. However, in moving to an income basis there should not be an adjustment to remove the accrued indexation if a loss would have arisen under the old rules. This will offset the disadvantage of losing indexation relief from the date that the new legislation is brought in.
3.55 Unincorporated businesses should have the same rules applied to them as companies. There is already the precedent for this with the existing rules for trades and capital allowances.
3.56 Firstly, defining expensive cars by being in excess of £12,000 is out of date. Simplifying the treatment of such cars by pooling would broadly be welcomed. There is no point in simplifying the treatment and then complicating it unnecessarily by trying to deal with the restriction required to the available allowance. A solution may be a first year allowance that works in reverse for cars of say 12% and thereafter 25%.
3.57 Providing expenditure qualifies under general principles there is no reason not to allow relief for the costs solely because the project is aborted. A capital loss for the abortive expenditure would be an ideal way of providing relief in the absence of wider reform. The points on anti avoidance are interesting, are the Government suggesting that a business would spend £1 to get 30p of relief?
LEASING
This seems to be big ticket leases and as SME's are explicitly carved out of these rules we have no comments on the leasing parts.