UK Treasury Proposes Major Corporation Tax Changes

by Jason Gorringe, Tax-News.com, London

06 August 2002

As predicted in this year's UK budget speech, the government is continuing with major reforms to the country's over-complex and archaic corporation tax system, launching yesterday a further consulotation document which addresses three key areas of tax policy: capital gains, the grouping of revenue types into 'schedules', and the distinction between trading and investment companies.

Announcing the consultation, Paymaster General Dawn Primarolo said: "In 1997 the Government set out to reform and modernise the corporate tax system and boost the UK's competitiveness in the global business environment. The strategy and objectives underpinning these reforms were set out in our consultation document of July 2001. They guided the reforms made in this year's Budget and the proposals discussed in today's document. I would urge businesses and all those with an interest in corporate tax to read and respond to the consultation."

The new consultation document Reform of Corporation Tax seeks the views of business and other interested parties on three potential areas for further reform:

• the tax treatment of capital assets not covered by earlier reforms;
• rationalisation of the way in which the schedular system taxes various types of income; and
• the differences in the tax treatment of trading and investment companies.

The most important aspect of the reforms could see the taxation of capital gains switched to an income-based regime, with gains taxed on the related income as shown in company accounts. Capital assets might be valued in accounts on a 'mark-to-market' basis, with gains and losses having an immediate effect on taxable profits. The capital allowances system would be abandoned, with assets depreciating in company accounts on a 'market' basis - although if inflation were to return this would cause problems as it did before.

The "schedular" system has been a feature of the UK's taxation regime for 200 years and groups different types of income into different 'schedules'. Businesses have complained that the system restricts their ability to set off their losses in one area against profits elsewhere.

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