UK Treasury Under Pressure To Defer Company Tax Reform

by Jason Gorringe, Tax-News.com, London

26 August 2003

After saying earlier this month that the UK government's proposed revamp of the country's corporation tax system would lead to a GBP 900m cashflow hit in the first year of a new system, the ACCA (Association of Chartered Certified Accountants) now says that the government should hold back on reform while many major companies complete a transition from British to international accounting standards.

Under EU legislation, most listed companies will be required to conform to international accounting standards from 2005. Although much remains to be decided about the exact meaning of 'international accounting standards', the London-based International Accounting Standards Board (IASB), headed by hawkish Sir David Tweedie would, importantly, treat the award of share options as expenses. This would reduce profits, of course, and the UK Treasury is likely to oppose anything with that effect. But it is on record as saying that it wants to bring the tax treatment of profits closer to their accounting treatment.

The corporation tax reforms already proposed by the Treasury, currently in an extended consultation period, would broadly speaking increase taxation by treating capital gains on a 'mark-to-market' basis, subjecting them to annual taxation. Other rules favoured by international standards advocates would result in an extension of 'mark-to-market' principles to financial instruments and pension liabilities, probably resulting in reduced profits for many companies.

It's not surprising therefore that the Treasury has remained tight-lipped on the subject of international accounting standards, saying only that it is in discussions with accountancy and tax bodies on appropriate responses to their adoption. The use of 'harmonised' financial reports to create a 'harmonised' EU tax base is, needless to say, a goal of the Commission, which recently concluded consultation on the issue. Equally obviously, the Treasury is against a common EU tax base, and will take refuge behind the UK's veto on tax matters if it is put to the test.

Chas Roy-Chowdhury, head of tax at ACCA, says: "The government must immediately address the tax consequences of moving UK listed companies from UK to international accounting standards. It should hold back on its stated wish to more closely align accounting profits and taxable profits through corporation tax reform until beyond 2005. This is necessary to allow the bedding down of international accounting standards."

It is perhaps idle to speculate, but it is likely that the UK will have to accept some marginal dilution of the precious tax veto during negotiations over the EU Constitution, and it is not beyond the bounds of possibility that tax-base harmonisation could make progress. This would indeed drive a coach and horses through the Treasury's limited reforms, and lies behind the stance being taken by ACCA and other UK fiscal advisory bodies.

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