The Relationship between
Corporate Income Tax
Reporting and IFRS: The U.K.
experience
Wayne Weaver
14 March 2006
Historical background –corporate
income tax in the UK
•
Patchwork of regimes
— business profits
— tax depreciation for plant and equipment
— savings and investment income
— income from land and buildings
— capital gains
•
Key concepts
— the schedular system
— capital v. revenue
— trading v. non-trading
— no tax consolidation (but special group rules)
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Business profits
• Inherently uncertain base
• Courts emphasis on accountancy evidence
— Gallagher v Jones
— Britannia Airways
— Herbert Smith v Honour
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Impact of macroeconomic
change since 1979
• Abolition of exchange control: 1979
• Big bang and financial liberalisation
• Growth of UK capital markets and the City
• Development of financial instruments
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Use of financial reporting measures
in recent UK tax legislation
•
Marine Midland and HMRC statements on forex: 1987
•
FOREX and financial instruments rules: 1993-4
•
corporate and government debt rules: 1996
•
reform of treatment of land etc income: 1998
•
business profits and GAAP: 1998
•
local currency treatment: 2000
•
reform of debt and derivatives rules: 2002
•
intangibles: 2002
•
management expenses: 2004
•
IFRS reforms: 2004-2005
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Changes in UK legislative approach
• 1993 FOREX legislation – highly prescriptive
• 1996 (loan relationships) architecture –
“authorised” methods
• 1998 use of GAAP for business profits
• 2002 reforms – rationalisation of regimes,
reduced use of elections in legislation
• 2004 and 2005 reforms – income as recognised
for accounting purposes
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UK government policy
• HMRC website statement
(http://www.hmrc.gov.uk/practitioners/int_accounting_index.htm)
• “There is merit in aligning…”
— “But…departures”
• Corporate income tax and financial reporting:
goal congruence
— descriptive
— alignment with stakeholders
— administrative simplicity
• Fundamental difference – tax concept is
normative, not merely descriptive
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UK government policy: departures
from financial reporting
•
Approximately 200 deviations from financial reporting
•
Differing objectives
— public policy
— symmetry
— avoidance
— transfer pricing
— fiscal incentives
— capital items
— structural e.g. debt/equity divide
The cash context – realisability and tax capacity
•
Importance of continuity: change brings complexity
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Adoption of IFRS for corporate
income tax reporting: the UK
experience to date
• Focus for debate regarding the interface of
financial and corporate income tax reporting
• Extensive consultation
• Rationalisation and reform
• Continuity
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Rationalisation and reform
• Designation of IFRS as acceptable GAAP for
corporate income tax purposes
— anti-arbitrage rule where different GAAPs used
in a group
• Debt and derivatives rules – computation in
accordance with “ correct” accounts, profits and
losses as recognised for accounting purposes
• Functional currency rules modified
• Retain value of R&D tax credits
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IFRS issues with limited UK tax
implications
• Accounting changes but special UK tax rules
apply
e.g. pensions, share options, insurance,
investment properties
• Limited accounting changes (from UK GAAP) or
changes seen as acceptable for UK tax purposes
e.g. business combinations, intangibles, leases,
revenue recognition, provisions
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Continuity
• “True reflection”: e.g. inclusion for tax purposes
of movements in equity statements
— effectively not following the accounts, triggering (largely
avoidable) complexity
• Maintenance of previous hedging rules for tax
purposes
— Some (but not all) cashflow and fair value hedges
— net investment hedges
• Special rules to address embedded derivatives
e.g. convertible bonds
• Initial resistance to defining transitional rules
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UK outcomes
•
Volume of change
•
Extreme complexity – unavoidable?
•
Highly prescriptive rules
•
Loss of control?
— legislative process
— planning
— compliance
•
Uncertainty
— e.g. regarding the financial impact, state of tax law
•
Increased compliance
•
Cash tax volatility
•
Transitional issues
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Further help on IAS:
Deloitte website
www.iasplus.com
Wayne Weaver
waweaver@deloitte.co.uk
+44 (0) 20 7303 4105
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Deloitte & Touche LLP
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