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Comments from ACCA
November 2003

INTRODUCTION

1. We have been involved in the consultation process both in 2002 and 2003. While the consultation document itself discusses a number of issues in very broad terms, and the background notes add some further clarification to the points raised in the document, we have had the benefit of seeing additional papers and engage in detailed discussions of many of the issues.

2. Due to the general nature of the consultation document our comments follow the areas which we discussed at the meetings.

3. We welcome the consultation document comment that the Government wishes to create a competitive UK Corporation Tax environment. We acknowledge that there have been a number of company tax changes since 1997, many of which have been positive. However, to balance this there have been a number of very complex rules introduced on the personal tax side, the abolition of dividend tax credits and the introduction of Corporation Tax Self-Assessment - which has lead to significant numbers of enquiries for small companies.

4. There has also been the creation of a greater degree of complexity in many areas of new tax legislation. Taken with other non-tax regulations the sheer volume of new burdens on businesses has risen significantly

5. The debate on schedular reform has moved on since the last consultation document. The options this time around are trying to draw a line in the sand against past losses and looking to implement changes in relation to the future.

6. We would be unhappy if the past losses were left stranded forever by any reforms. There should be a mechanism, without creating the complexities of shadow ACT, to offset those losses in future but within a ¿ring fenced¿ regime.

7. At the meeting on this area we made it clear that we would welcome full pooling rather than partial reform. As we called it at the meeting we would like to see the ¿big bang¿ option rather than a ¿little bang¿.

8. If the Inland Revenue and Ministers agree to go the whole way to full pooling then we consider it would be better to this in one go rather than by way of an intermediate stage, introduced in next year¿s finance bill and then repealed or amended to introduce full pooling in 2005.

9. As a part of the general reforms in this part of the Corporation Tax system we consider pre-commencement losses should be allowed to be carried forward to any new regime and relieved say across three years.

10. The issue of tax nothings is largely a result of the capital/revenue boundary but the rule for deduction of the "expenses" should be changed so that all business expenditure can obtain a deduction regardless of whether or not there was a successful move to an accounting/tax alignment.

11. As an ancillary point to expense deductions. If transfer pricing were applied within the UK then the current position where a management or holding company carried all the costs of running the group will have to be addressed. It will be highly onerous to reallocate such costs around the group companies. We discuss transfer pricing and thin capitalisation in more detail in its own section below.

12. It should be optional for businesses with foreign income to pool that part of their income, so that they can avoid the loss of double tax relief. This option would be especially important for businesses which for regulatory reasons are unable to restructure their branch network.

13. Most businesses would welcome a change to the trading/investment company rules. This will be essential if transfer pricing rules were adopted across the UK as many companies may consider amalgamating subsidiaries in to a single company in order to avoid the burden of transfer pricing record-keeping and the potential for challenge from the Inland Revenue.

14. The primary reason for much of the debate is because of the prospect of the European Court of Justice (ECJ) attack. While the Inland Revenue is keen to see if greater accounting alignment can be achieved this is perhaps a longer term objective. We consider, other than to safeguard a section 42 attack in the ECJ, the total overhaul of the system in this area is unwarranted and unwanted by the majority of businesses.

15. We share the Inland Revenue¿s concern of the potential for a successful challenge at the ECJ against the current UK centred capital allowance regime for leased assets. We are not sure that the idea of changing the definition of a finance lease will remedy the problem. In our view the only way forward is to allow the lessee of the assets to have entitlement to the capital allowances but with a mutual election available to transfer the allowances to the lessor. It would then be unlikely for a situation to arise where an overseas lessor could gain entitlement to UK capital allowances unless those assets were being used in the UK.

16. Such a change, while it would create additional compliance requirements, could be seen as creating a potential benefit to SMEs which currently do not receive any special treatment for leased assets hence do not benefit from the 40% first year allowance.

17. The representatives at the meetings in this area were very much of the view that the system while not perfect worked and fulfilled the Government¿s objectives of being able to target higher rates of allowances to specific sectors, such as SMEs. We support this consensus view.

18. Firstly the alignment of WDAs with the accounting depreciation is full of pitfalls and inconsistencies. We do not consider that the preparer of the financial statements should be under pressure from the tax system to maximise depreciation in the accounts. This will create an unenviable dilemma for accountants who on the one hand will be under pressure from shareholders and the markets but will now also have to keep an eye on the tax impact of their judgement. It could also mean the headache of having to deal with Inland Revenue challenge to the depreciation rates used.

19. Adopting an accounts based depreciation system will also create added complexity as the Government has said that it still wishes to have the ability to provide accelerated depreciation allowances. We wonder exactly how it is expected that a mix of accounts based and statutory depreciation might work. Especially as the targets are likely to be SMEs who have sufficient difficulty dealing with the complexities and burdens of the UK regulatory regime.

20. The market distortion arguments have been refuted by business after business during the consultation process. The Inland Revenue should keep in mind the wide ranging objections to any change.

21. IBAs are an allowance with its own problems but a move to another statutory system is likely to be problematic. The new system may well be one which provides entitlement to a depreciation allowance for all commercial buildings but the trade-off is that significant levels of capital allowances will be foregone. What is currently treated as plant and machinery will just become a part of the building.

22. Such a new regime will create significant losers. For example the supermarkets which totally refit their stores every three to four years and are able to treat 80 ¿ 90% of the refit costs as plant will be severely affected. In addition the new system would not necessarily create simplicity as the boundary for what is plant and what is the building will be moved rather than disappear.

23. We consider there should be a broadening of the existing system and a slight modification of its operation. ACCA has asked for many years that IBAs should be available to all commercial buildings. There should also be a change to the claw-back provisions for IBAs which should apply for the tax life of the building of say 25 years. There would then not be any balancing charge on the sale of the building the new purchaser would be purely entitled to the writing down allowance across the existing tax life of the asset.

24. We consider a move to an accounting basis for taxing gains or losses on capital assets is unwelcome. Other than the easier elimination of tax nothings by dispensing with the capital/revenue divide the concept of bringing in to tax unrealised gains and the losses as well as the abolition of the indexation allowance is not likely to be a move for the better.

25. While the Inland Revenue is indicating that it will not seek to tax unrealised gains on properties they still expect businesses to keep a significant volume of unnecessary information in keeping track of the accounting gains and losses of the buildings from year to year until actually sold. The whole idea of alignment with the accounting treatment, especially under fair value accounting principles, is likely to lead to volatility and additional compliance.

26. We heard, from businesses, during the meeting on the ¿Taxation of Capital Assets¿ that the indexation allowance was worth more now in a low inflation environment than when the inflation rate is higher. While the Inland Revenue provided the arguments of a theorist, at the meeting, as to how the allowance was not useful it was acknowledged, by businesses, that there was a lack of correlation between the theory and reality. The dispensing of the indexation allowance as part of a package is therefore not acceptable.

TRANSFER PRICING AND THIN CAPITALISATION

27. More than any other area of the Corporation Tax reform proposals this is purely ECJ driven. The UK Government would not even consider a single change if it was not for its fear of attack from the European Court. The Inland Revenue and the representatives are very much at one in dealing with this dilemma. We pointed out however, at the meeting, that care should be exercised in over-reacting to a phantom threat. While we should be prepared legal opinion should be obtained before new rules are introduced.

28. If the legal advice is that transfer pricing rules should be applied to UK to UK transactions then adequate steps need to be taken to exclude SMEs and even slightly larger groups from the new regime. We were in agreement at the second meeting on transfer pricing that there should be an entity based exemption as well as a de minimis limit of perhaps £100,000 adjustment. The combination of the two exemptions should mean 100% of SMEs will fall outside the new transfer pricing net. In addition most medium size UK groups should fall within the adjustment exemption therefore, also be excluded.

29. We consider the exchequer risk of such exemptions, directed at SMEs and medium sized groups will be very small, as few such companies will operate across borders.

30. The thin capitalisation issues will disappear for SMEs with the exemptions but there will be problems for UK groups which are not exempted. There may have to be restructuring undertaken by some groups so that the loans came in to the group, from a third party at the appropriate tier. Overall this extension of transfer pricing to cover thin capitalisation was unwelcome and had the potential to become burdensome to businesses.

31. We have discussed in our comments the key issues of the reform proposals. Before any action is taken very great care must be exercised not to change any part of the Corporation Tax regime for the sake of theoretical notions of simplicity and logic. This plea is aimed at the whole area of aligning the tax treatment to the accounting treatment in the misplaced belief that it will create a logical, simple and transparent tax system. Much more consultation is required in this area and in many respects the changes would be best left until the accounting changes of 2005 take place.

32. We will be pleased to participate in the further consultation which will be necessary.

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