Why does British business need a simplification of corporation tax? Did you know that the UK tax code stretches to 17,000 pages? It would be longer but in later editions, they shrunk the size of the text on each page, presumably in an effort to save on paper and printing costs.

Back in 2009, Accounting Web was reporting that the UK tax code was the longest in the world and CCH Daily asserted in 2016 that the code was 12 times the length of the King James Bible.

Established in 2010, the Office of Tax Simplification (OTS), part of HMRC, was created with the goal of “reducing tax compliance burdens on both businesses and individual taxpayers.”

This July, the OTS published a series of “bold recommendations to improve the experiences of small and large businesses.”

The two main changes affecting companies with turnover of £2m or less surround how to define taxable profit and on whether the forthcoming Making Tax Digital (MTD) system creates additional opportunities for simplification.

Simplification of corporation tax – Accounting profit versus taxable profit

One of the reasons you employ your accountant is to get your tax bills down.

However, the OTS argues that, with the rate of corporation tax soon reducing to 17%, that all the time it takes to gather information and make decisions on how to adjust your profit levels in an accounting year becomes less worthwhile.

The thinking behind this is that the benefits from adjusting your tax figures may be outweighed by the cost of paying your accountant to make them.

Over the last 150 years, the number of adjustments that are permitted to decreased taxable profit runs to 21 pages – click here to see this enormous list for yourself.

The OTS is looking for ways to streamline the number of adjustments, keeping only the ones that “add material value either to the business (incentives and reliefs) or to the Exchequer (discourage non-compliance or measures to tax specific items)”.

In November 2017, they’ll be publishing their, as they call it, “starter for ten” for companies and agents (like Burton Beavan) to pass comment on.

As soon as it’s ready, we’ll post it on our blog.

Burton Beavan landmine alert – the OTS is currently suggesting that all micro-businesses (companies that have two or more of the following characteristics – £632,000 turnover or less, £316,000 gross assets or less, 10 employees or less) will not be permitted to make any adjustments at all. For slightly larger businesses, a maximum of five or six may be allowed.

Simplification of corporation tax – Making Tax Digital

MTD has changed so much in the last few months that we accountants have no real certainty when it’s going to be brought in and who it’s going to affect first. We appreciate that trying to change a tax system that has developed over hundreds of years is difficult but when you’re dealing with something as important as tax, it’s up to the government and HMRC to give much better leadership and clarity than they are. Rant over.

For those of you who don’t know, MTD is a scheme that will replace annual personal and corporate tax reporting with four quarterly versions, followed by a balancing annual tax report ten months after financial year end.

That doesn’t mean you have to pay your personal PAYE, dividend tax, tax on other income sources, or corporation tax quarterly yet.

“Yet” is the crucial word in this sentence because once MTD is in place, there will be nothing that can theoretically, politically, or technically stop a government from making you pay personal and corporation tax as often as you pay VAT. After all, many very large companies already make quarterly corporation tax payments.

OTS’s current opinion is that “any end of year activity (such as final tax adjustments that may require professional advice) should be a standalone process from the provision of regular updates.” This offers some reassurance that there are no imminent plans for quarterly taxation payments, at least for the foreseeable future.

Simplification of corporation tax – Summary

We welcome any attempt to simplify corporation tax. We’d also welcome an approach to simplify lots of other types of taxation.

We are concerned about this plan for two reasons. MTD will, in theory, make tax clearer but at the cost of much more labour-intensive compliance. Second, even though corporation tax is going down, the removal of many well-used allowances may serve to increase the amount of tax your company pays. And the situation is even worse with the potential removal of all adjustments for so-called “micro businesses”.

It’s hard to see how more work for accountants and fewer adjustments means you pay less in tax and professional fees than the current set-up.

Call the team on 01606 333 900 or email us at hello@burtonbeavan.co.uk.