Simplifying Corporation Tax

OTS proposes changes to reduce tax burdens

The Office of Tax Simplification (OTS) has recently published its recommendations for making corporation tax (C.T) easier in its report, ‘Simplification of the corporation tax computation’.

To date, there has been little focus on making C.T operate more simply for the benefit of the vast majority of companies. To address this, the OTS has made some suggestions to simplify the current administration of C.T from the perspective of companies both small and large. Some of their ideas could also be considered for unincorporated business taxation.

The report looks at four main issues:

  1. Simpler tax for smaller companies
  2. Aligning the tax rules more closely with accounting rules
  3. Simplifying tax relief for capital investment
  4. Issues affecting the largest companies

In the 2014 report on the competitiveness of the tax system, the OTS outlined an important principle that C.T should be a tax on business profits arrived at after deducting all legitimate business expenses, the profits being those disclosed by the business accounts. There should be a minimum number of adjustments, and these should be in accordance with a clear and well-understood policy.

Tax should follow the accounts

This is the starting point for C.T reform as it is important because it offers smaller companies, in particular, the prospect of simpler procedures.

The company’s accounts reflect the commercial reality of its business operations. As accounts are prepared under a set of well-understood accounting rules, it is logical for tax charges to be based, as far as possible, on these accounts, with the minimum of adjustments. In practice accounts are the basis of the tax charge, so the report looks at the extent to which the calculations and decisions for tax differ from accounting, introducing complexity and administrative burdens.

For all companies, the aim of the OTS is to improve the C.T system so it is easy to understand and engage with and to give smaller companies the confidence to do their own tax return or ‘self-serve’ if they so choose. To help achieve this, the OTS proposes that:

  • micro-companies opting to use simpler accounting principles should be taxed on their accounting profit
  • micro-companies excluded from the small companies regime, the tax calculation should be simplified to require only a minimum number of essential adjustments to the accounting profit
  • in future, optional cash accounting could be introduced for companies with a turnover under £150,000 to mirror the system for 1.1 million unincorporated businesses.

The principle here is ‘do it once’. If small companies have to prepare accounts, the work that they put in should be sufficient to calculate their C.T liability with only minimal additional input.

Only significant reform to the C.T rules will make a real difference to the time taken by companies on C.T administration.


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