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Lords Say UK Corporate Tax System Is Too Complex

by Robert Lee, Tax-News.com, London

21 June 2007


A House of Lords committee has criticised the government over its latest tax moves to "simplify" taxation for small businesses and has recommended that a more "determined and consistent" effort is made to improve the UK tax system and ultimately its international competitiveness.

The remarks by the Lords Economic Affairs Committee came in response to the latest tinkering with tax laws and administration by the Chancellor of the Exchequer, Gordon Brown.

"It is undeniable that the present tax system is highly complex," the committee said. "Simplification is essential if costs for businesses are to be reduced, greater certainty achieved, and the UK made more attractive to mobile international businesses."

"We recommend that a more determined and consistent attempt at simplification be made," the Lords argued. "What we see in this Finance Bill is a very modest step and more could be done. This will necessarily take more than one year and will require a combination of administrative and legislative measures. There clearly may be a tension here with the desire for fairness: it will also be necessary not to open up scope for avoidance. But it should be possible to find a balance here if the work is well researched and subject to wide consultation."

The 2007 budget cuts the main rate of corporate tax by 2% to 28% in 2008, but increases the corporate tax rate for small business by 1% to 20% in the interest of reducing tax motivated incorporations. It also extends for a further year the increase to 50% in the first year allowance for expenditure on plant and machinery by small businesses, and extends the definition of small or medium-sized enterprises (SMEs) for research and development (R&D) tax credits, so that a wider range of companies will qualify for the higher credit of 150% rather than the 125% for large companies. However, these measures, unveiled in what has been trumpeted by the government as one of its most business friendly budgets, have met with a mixed response from the tax and business community.

Ian McCafferty of the Confederation of British Industry (CBI) told the Lords Committee that the Bill offered "only what we would call a superficial element of simplification". He also pointed to the abolition of the buildings allowances, and suggested that the further changes in capital allowances would add a modest complication to the system.

Ashley Greenbank, speaking for the Law Society of England and Wales, was more negative. "We think that any claims to simplification that there have been over the last few years, perhaps particularly in relation to the business tax package, is a joke," he remarked.

Chas Roy-Chowdhury for the Association of Chartered and Certified Accountants (ACCA) stated that: "The business tax package specifically does not do anything very much for simplification", while Frank Haskew for the Institute of Chartered Accountants in England and Wales (ICAEW), endorsing that, added: "What we are doing is probably replacing one lot of complexity with another lot of complexity."

In its written evidence, the British Chambers of Commerce (BCC) announced that: "The BCC does not believe the introduction of a Capital Allowance together with changes made to the main rate and small companies rate of corporation tax represents simplification." It also expressed concerns that simplification of the tax regime must not undermine certainty for the business community.

In response, Peter Curwen for HM Treasury said that, within the package, simplification was a key element in encouraging investment and ensuring fairness. He pointed to the reforms to the capital allowances which were aimed at ensuring efficiency and simplicity, and to the reduction in the impact of tax as a factor in incorporation. He added that simplification would be one of the key aspects in the consultation on the implementation of the annual investment allowance.


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