The reform of corporation tax

The current Government's thirst for reforming the UK corporation tax system is not yet sated if the publication on 6 August 2002 of a consultative document entitled "Reform of Corporation Tax" is anything to go by. These proposals follow on from a number of changes that have already been made to the corporation tax regime including the introduction of a participation exemption for disposals of substantial shareholdings, a new tax regime for intangible property and a revision and merger of the corporate debt and FOREX legislation.

There can be little doubt that there is merit in modernising the corporation tax regime and it is unlikely that many would grieve over the proposed abolition of the schedular system of tax that many would regard as a historical anachronism. The schedular system generally acts as a restraint on companies setting losses arising from one type of income against profits from another (although it is likely that some restrictions would still remain under any new regime) and otherwise complicates the system by requiring the application of different rules to the computation and recognition of income from different schedules.

There are also welcome indications that reform may see the elimination of "tax nothings"; items of expenditure that a company does not receive a deduction from tax for of which there are too many. The general tenor of the proposals is to move further towards the alignment of taxable profits with accounting profits (a movement that is already underway).

Nevertheless, not all will welcome the proposals and while some may benefit, others may find that their tax position is worsened. It is proposed that the current capital allowances regime will be discontinued so that companies will obtain tax relief on capital expenditure through the depreciation charge in the accounts. For many companies this will often mean that the relief is obtained less quickly than under the capital allowances regime. This will be a particular disadvantage for companies in capital-intensive industries.

It is also proposed to abolish the distinction between capital and revenue, so fundamental to our current tax regime. One of the suggestions made in the consultation document is that companies would be required to pay tax on unrealised gains where assets had been revalued for accounts purposes. This proposal would have significant implications for property investment companies in particular. A further by-product is the proposal to abolish indexation relief, thereby bringing inflationary gains within the charge to tax. It is also likely that capital gains would be brought within the scope of the Controlled Foreign Companies regime.

The Government invites comments on the consultation document but requires these by no later than 29 October 2002. Whilst this technically falls within the 12 week minimum period for consultation under the Code of Practice it is a pity that further time has not been given in light of the fact that we are in the middle of the holiday period and the subject matter of the consultation is wide ranging and of great importance. It is to be hoped that there will be further rounds of consultation and that the Government do not regard the expedition of reform as more important than the content.

A copy of the consultation can be accessed from the Inland Revenue website at www.inlandrevenue.gov.uk/consult-new.

For further information please contact:

Richard Croker
Corporate Tax Partner
Phone: + 44 (0)20 7367 2149
Email: [email protected]

Michael Boutell
Senior Professional Support Lawyer
Phone: + 44 (0)20 7367 2218
Email: [email protected]

Stuart Hale
Professional Support Lawyer
Phone: + 44 (0)20 7367 3102
Email: [email protected]