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Comments from ACCA
February 2004

ACCA�s is pleased to comment on the above consultation issued by the Inland Revenue. This phase of the consultation is largely technical with action being proposed in those areas which are most subject to risk of attack from the European Court of Justice (ECB). We have sympathy with the Government�s concerns and have participated in the consultation meetings in that spirit.

Our comments on specific issues are set out below.

1. UK TRANSFER PRICING - EXEMPTIONS FOR SMEs

The introduction of a UK inclusive transfer pricing system will bring with it a very large compliance burden of possibly irrelevant information and survey evidence, as well as tax adjustments which will ultimately be cancelled out by a corresponding adjustment. This will result in no additional UK tax.

The decision to exclude SMEs from the burdens of the new transfer pricing rules is welcome. That being said, we do have some concerns with the caveats placed on the exemption for where the SME has dealings with non-treaty jurisdictions.

2. RESERVE POWERS FOR MEDIUM SIZE BUSINESSES

We are not convinced that reserve powers are necessary for medium sized businesses. The exclusions which exist for small businesses should be sufficient. We are aware. however of the Government�s concern over tax manipulation, hence it is a near certainty that reserve powers will be introduced.

It is important that the stringent parameters which were set out in the paper we saw at the Corporation Tax Reform meeting, on reserve powers, should be adhered to. We agree that the powers should be centrally operated with the taxpayer able to appeal to the General Commissioners.

3. EXTENSION OF RELIEF FOR EXPENSES OF MANAGING INVESTMENTS

We generally welcome new clause 75 and the intention to extend corporation tax relief for the expenses of managing investments so that trading companies can obtain the deduction. However, the clause also reduces the impact of the relief by the creation of a tax nothing under section 75(2)(b). Sub-section (b) should thus be deleted. The capital revenue divide is sufficiently well defined by precedents so as not to require further restrictions.

The clause start date of 1 April 2004 should be rewritten to say accounting periods ending on or after 1 April 2004. Hence the splitting of an accounting period would not be required.

4. GRANDFATHERING AND SECURITISATION

There are a significant number of legal issues surrounding loans and securitisation which we will leave to the legal profession to make representations on. Our concern is with the general extension of transfer pricing rules to cover UK thin capitalisation.

We consider that it would have been appropriate to allow grandfathering of existing loans; otherwise there will be the need to make tax adjustments and compensating adjustments - hence creating additional unnecessary compliance. The Government clearly considers that this might then still leave it open to ECJ attack, hence is choosing not to. It would have been useful, therefore, if the Government were more willing to share its legal advice with the representatives representatives of the profession and business so that we could have been better informed of why some options were chosen.

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