Peter Marriott
Inland Revenue
Business Tax
Room 5E1, 5th Floor
22 Kingsway
London
WC2B 6NR
29th October 2002
Dear Mr Marriott,
London Chamber of Commerce and Industry Taxation Committee
Consultation Document: Reform of Corporation Tax
This letter is in response to the consultation document issued in August 2002 and has
been prepared by the Taxation Committee of The London Chamber of Commerce.
We welcome the opportunity to comment on the document and have sought in past
budget submissions for a system of business taxation that follows the accounts and
allows for tax depreciation based on accounts for assets not presently covered by
capital allowances. We have made these comments not only in the context of
companies but for business as a whole, i.e. those subject to income tax as much as
corporation tax.
The consultation document asks a large number of questions that require a long term
analysis. In our view the substantial issues raised would need to be reviewed over at
least a two year period before any radical changes were made. Therefore we have
divided our comments into what we consider could be dealt with in the shorter term
and in the longer term. We would strongly urge that there be a period of stability
before any wholesale changes to the tax system are made. There have been enough
changes introduced in recent budgets to last a number of years; the length of the
Finance Acts continues to cause a great deal of concern amongst the business
community and it is for this reason that we would strongly recommend a cautious
approach.
Any changes made will need to take account of the taxation of UK branches of
foreign businesses and companies, as well as purely domestic based business.
London attracts a great deal of inward investment and clearly any measures proposed
should be carefully reviewed to maintain that advantage. At the same time it is
important that there is no discrimination which would be in breach of EU Law or the
terms of double taxation conventions. Of equal importance would be to ensure that
both corporate and non-corporate business entities (including sole traders) are subject
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to a similar basis of taxation. Therefore any changes under consideration should in
our view apply to income as well as corporation tax. The tax system becomes more
complex if there are different rules for the measurement of profits for companies and
other entities.
Short term changes
Introduction of tax depreciation on all assets depreciated in accounts
As mentioned at the beginning of this letter, business would welcome an extension of
the present system to cover those assets that do not presently benefit from those
allowances. In our view it should be possible for tax payers to benefit from the
present capital allowance system and also be permitted to have depreciation for other
assets in line with their accounts. This should not require wholesale reform of the tax
system and would not require any change to the taxation of capital gains. As for plant
and machinery under the present capital allowance system, allowances for those assets
could be clawed back when assets are disposed of. We would welcome such a reform
as it would reflect the real costs incurred by business and still retain the incentives
provided under the present system.
Although the change recommended above would be a cost to the exchequer, business
has had to bear the costs of increases in national insurance introduced over recent
years. This has not been a welcome measure, as unemployment in the service and
other sectors has increased over recent months and has particularly hit London hard.
An extension of the capital allowance system as suggested above would to some
degree ameliorate the situation as it would allow businesses operating in those sectors
to obtain some further tax relief for depreciation, for example depreciation of the
buildings that they presently occupy.
There is a recognition that the present tax system gives rise to ‘tax nothings’. For
example the rigid investment/trading company divide can lead to certain expenses not
being relieved at all for tax purposes. The costs of raising equity may also not be
deductible. In principle the concept of carrying on a ‘business’ should not lead to any
difficulties in tax treatment from that of carrying out a ‘trade’. As a part of a
consideration of the tax system over the short term, we would therefore welcome the
possibility for companies to obtain relief for costs on raising equity finance and more
generally for businesses to obtain relief for abortive capital expenditure, e.g. on
potential investments not ultimately acquired, as well as relief for costs on the
acquisition of leasehold premises. These ‘tax nothings’ should be regarded as
legitimate costs of running a business.
Long Term Changes
As mentioned above we would not urge radical reform of the present schedular or
capital gains tax regime in the short term. We would prefer this to form part of a long
term review, as there are very many significant implications for the tax system as a
whole.
In the long term we may be in favour of a substantial simplification of the schedular
system, which addresses the points raised in the consultation document, including the
distinction currently existing between revenue and capital, as well as that between
trading and investment activities. This may include:
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All income going into one pot, so that there is no distinction between trading
and investment activities.
A system of capital allowances which permits companies to obtain relief for
assets which are depreciated in the accounts (as discussed under the short term
above).
All losses going into the same pot, and permitted to be carried forward against
the pots of income in future years, or carried back for, say, one year against
the previous year’s pot of income.
Capital gains being included in the same pot and treated as a part of the total
profits; equally capital losses being included in that pot and not streamlined.
In this context we recognise that there may need to be a ‘shadow system’ to take
account of brought forward losses, which may streamline classes of income and gains,
where those losses arose under the present schedular system.
These comments are only very preliminary and require much further scrutiny. As
indicated in the consultation document the taxation of groups would also need to be
reviewed.
As mentioned above, in the long term we would support a system that taxes
businesses in a similar way whether subject to income or corporation tax. We would
propose that if shareholders decide to disincorporate a company there should be no
claw back of losses. Indeed we may favour a system whereby a company can be
taxed on a ‘see-through’ basis, i.e. similar to that in the US for ‘S’ corporations.
Summary
As a chamber representing the London business community we would strongly urge
that any reform of the present schedular and capital gains systems of taxation be
reviewed over the longer term. The business community has faced enormous changes
in recent years. In the short term we would recommend an extension of the present
system of capital allowances to include all assets depreciated in the accounts of a
business.
Yours sincerely
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