The OTS’s report makes several recommendations on how to improve the CT return experience for businesses of all sizes.
The Office of Tax Simplification (OTS) has published a report on the simplification of the corporation tax (CT) return. The report makes recommendations on how to simplify and modernise the tax system to reduce the compliance burden on businesses and make the UK a more attractive place to do business. While the report covers CT, the OTS has highlighted that many of the recommendations could be applied to unincorporated business taxation, especially with the need for a simpler tax system for those soon to be dealing with Making Tax Digital (MTD).
The report is divided into five chapters, and we discuss the key recommendations from each chapter below.
Aligning CT more closely with accounts: capital expenditure
The report considers in some detail the potential impact and outcomes of replacing capital allowances with accounts based depreciation to give tax relief on capital expenditure. It sets out some of the research that the OTS has already undertaken, including examples from other countries on how such systems could work. The OTS acknowledges the real challenges in using accounts depreciation (e.g. cost to the exchequer, ensuring no one is worse off and avoiding replacing one complex system with another) and recommends that further work should be done to fully explore the impact of such a change.
The OTS also proposes an extension to the Capital Allowance (CA) regime should an accounts based depreciation approach not be feasible. It recommends relief on buildings that are used in the commercial activity of the business, introduction of a small capital de minimis, abolition of short life assets, HMRC producing a list of assets that qualify for capital allowances (removing boundary issues), introduction of a binding ruling service, reduction in number of pools and introduction of one flat writing down rate, review of the current process around s198 CAA2001 elections and improvements to the Enhanced Capital Allowances (ECA) claim process.
The OTS is proposing a radical approach to simplification and its report does contain some thought provoking content. The OTS acknowledges that utilising an accounts based approach has been suggested before (2002). The difficulties of changing to this approach from capital allowances, with the inherent work arounds that will be needed, to factor in different stakeholder demands (e.g. HMRC, HMT and different sectors with a heavy capital base) make this a very challenging prospect and the OTS is recommending more work is done to explore the impact of such a change.
The changes being proposed to the CA regime are no less radical and there will be considerable debate on some of these proposals, not least the proposal to give tax relief to building expenditure used for commercial activity.
These proposals relate only to corporation tax so it remains to be seen how all of this will work for income tax purposes.
Aligning CT more closely with the accounts
The OTS recommends that the tax treatment of capital and revenue expenditure items should follow the accounts. This would reduce the burden of having to analyse capital expenditure for tax purposes.
The report also notes that the treatment of trading expenses, property expenses, and management expenses follow similar, but not identical, rules. It recommends that the definitions of these expenses could be aligned to produce a more logical result without hugely affecting the outcome.
Aligning CT more closely with the accounts: schedule reform
Following feedback that the schedular system of CT is a historical anachronism, the OTS has called for the Government to develop a roadmap on structural reform of this system. This would reduce the administrative burden of splitting out income and expenses for each schedule where there is no commercial need to do so.
Areas specific to large and complex companies
The OTS has called for the Government to publish a specific CT roadmap, to be used alongside the business tax roadmap. This would include a commitment for the Government to use early and open consultation to ensure that new tax measures achieve the stated aims and do not introduce unnecessary complexity.
It has also recommended that the existing Customer Relationship Manager (CRM) role be embedded in HMRC’s strategy. The CRMs provide larger businesses with a way to get greater certainty when navigating complex tax issues.
Simplifying CT for smaller companies
Two options for simplifying CT for micro businesses are set out:
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