OTS: Simplification of the Corporation Tax computation

The Office of Tax Simplification (OTS) published its report 'Simplification of the Corporation Tax Computation' in July 2017. It makes recommendations for Corporation Tax to be modernised and simplified.

The report looks at 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.
• A range of further issues affecting the largest companies.

It also highlights the links with HMRC’s work on Making Tax Digital (MTD), which offers a real impetus to move towards a simpler system by use of technology.

Angela Knight CBE, Chair of the OTS Board, said, "Despite the attention, Corporation Tax has received in recent years, in particular regarding multi-nationals, 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".

Paul Morton, 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 report makes recommendations to achieve this objective in a variety of innovative ways. It sets the scene for further work on the costs and benefits of moving to a depreciation-based approach to giving relief for capital expenditure which could offer a significant simplification for companies of all sizes.

Main recommendations

Small companies

• To use the accounting profit prepared under accounting standard FRS105 as the taxable profit without any adjustments.
• For slightly larger companies, the proposal is that companies should only need to consider a set list of five or six potential tax adjustments.

Aligning tax with accounts

Across the whole range of companies, for

• The tax definition of capital and revenue to be more closely aligned to the account definitions.
• The rules for trading and management expenses to be aligned.
• 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, in line with most other countries.

Capital expenditure

For the OTS to undertake further work on capital expenditure to explore the issues involved in replacing the present capital allowances system with an accounts depreciation approach and recognising the need to consider the impacts on particular industry sectors.

Large companies

For improvements to be made in a number of technical areas, in the context of promoting stability and certainty in the Corporation Tax system.

External link

OTS: Simplification of the Corporation Tax Computation