What might the UK legislation look like if it was rewritten to follow a more accounts-based approach to business tax, asks David Martin (Centre for Policy Studies)
The recent OTS report on the competitiveness of the UK tax administration (referred to above) made some very interesting suggestions about taxing businesses on their profits (rather than streaming trading and investment results), aligning tax and accounting profit more closely, considering replacing capital allowances with allowable depreciation, and eliminating sundry tax adjustments.
What might this entail?
Profits from trades, professions and vocations, properties, business investments, including miscellaneous receipts, capital gains and foreign source profits realised by a business, should all be subsumed under one head of taxation – ‘business’.
The tax base should then be defined by reference to the economic results of the business. No one would now dream of creating our current mish-mash of tax rules, if the objective is actually to tax real profits and give tax relief for real losses.
The accounts would provide a starting point. Smaller and less sophisticated businesses would be allowed simpler accounts than are required under GAAP. For the simplest businesses, a three-line account (income minus expenses equals profit) would be all that is needed. But where IFRS is used, a ‘bridge’ would be required to the tax base, focusing on real transactions and eliminating fair values where these are not wanted. The accounts should capture all the economic activity of the business, whereas ‘tax nothings’, such as non-deductible capital expenses, are an unjustified feature of existing tax law.
The basic figure of profit would still require adjustments to provide tax reliefs, to prevent avoidance, and to make the tax code work properly; but the tax code could include these adjustments and still be made very much shorter and more user friendly than what we have at present.
What problems stand in the way of implementing this approach? Would it be attempting too much? Would there be unintended opportunities for new avoidance? What about transitional rules? What would be the impact on Treasury receipts? More work is required on these issues, but the problems themselves are not insuperable.
What might the new law look like if this approach were to be pursued wholeheartedly? My blog on the Centre for Policy Studies website (see below) provides a link to two papers. The first, The reform of business tax, discusses the above principles and examines all the sections in the major tax acts to see whether they are still needed.
The Business Tax Act then sets out how tax law might appear in consequence of applying the first paper. It is intended that all the tax law that would normally be needed for small or uncomplicated businesses should be given in Parts A–E of ‘The Business Tax Act’. This is 14 pages long, with Schedules A–E providing more detail if certain issues arise. More sophisticated businesses would potentially have more complicated tax law to cope with in the remaining parts and schedules of ‘The Business Tax Act’. But they would not be subject to a different tax code, just more tax sections which might apply to them.
In terms of length, ‘The Business Tax Act’ is the equivalent of about 400 pages in Tolley’s Yellow Tax Handbook. If the above approach were to be implemented wholeheartedly, the impact on UK business tax law would be substantial.
What might the UK legislation look like if it was rewritten to follow a more accounts-based approach to business tax, asks David Martin (Centre for Policy Studies)
The recent OTS report on the competitiveness of the UK tax administration (referred to above) made some very interesting suggestions about taxing businesses on their profits (rather than streaming trading and investment results), aligning tax and accounting profit more closely, considering replacing capital allowances with allowable depreciation, and eliminating sundry tax adjustments.
What might this entail?
Profits from trades, professions and vocations, properties, business investments, including miscellaneous receipts, capital gains and foreign source profits realised by a business, should all be subsumed under one head of taxation – ‘business’.
The tax base should then be defined by reference to the economic results of the business. No one would now dream of creating our current mish-mash of tax rules, if the objective is actually to tax real profits and give tax relief for real losses.
The accounts would provide a starting point. Smaller and less sophisticated businesses would be allowed simpler accounts than are required under GAAP. For the simplest businesses, a three-line account (income minus expenses equals profit) would be all that is needed. But where IFRS is used, a ‘bridge’ would be required to the tax base, focusing on real transactions and eliminating fair values where these are not wanted. The accounts should capture all the economic activity of the business, whereas ‘tax nothings’, such as non-deductible capital expenses, are an unjustified feature of existing tax law.
The basic figure of profit would still require adjustments to provide tax reliefs, to prevent avoidance, and to make the tax code work properly; but the tax code could include these adjustments and still be made very much shorter and more user friendly than what we have at present.
What problems stand in the way of implementing this approach? Would it be attempting too much? Would there be unintended opportunities for new avoidance? What about transitional rules? What would be the impact on Treasury receipts? More work is required on these issues, but the problems themselves are not insuperable.
What might the new law look like if this approach were to be pursued wholeheartedly? My blog on the Centre for Policy Studies website (see below) provides a link to two papers. The first, The reform of business tax, discusses the above principles and examines all the sections in the major tax acts to see whether they are still needed.
The Business Tax Act then sets out how tax law might appear in consequence of applying the first paper. It is intended that all the tax law that would normally be needed for small or uncomplicated businesses should be given in Parts A–E of ‘The Business Tax Act’. This is 14 pages long, with Schedules A–E providing more detail if certain issues arise. More sophisticated businesses would potentially have more complicated tax law to cope with in the remaining parts and schedules of ‘The Business Tax Act’. But they would not be subject to a different tax code, just more tax sections which might apply to them.
In terms of length, ‘The Business Tax Act’ is the equivalent of about 400 pages in Tolley’s Yellow Tax Handbook. If the above approach were to be implemented wholeheartedly, the impact on UK business tax law would be substantial.
