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The Chartered Institute of Taxation has recorded its support for aligning taxable profits with a company's accounts, but has questioned plans to begin such a move in relation to smaller firms.
In its response to the Treasury's simplification review on tax calculations and returns for smaller companies, the CIOT says it would like such an alignment to be reviewed for the whole of the corporation tax regime.
It is concerned that 'changing the rules for only smaller companies… raises the question as to what happens when [a firm] goes over the threshold and becomes a larger company'.
The institute also comments that 'the benefits of tax/accounting alignment would be much fewer for smaller companies than for large ones because… they typically make fewer adjustments in any event and… they have less real need to produce GAAP accounts for non-tax purposes'.
For these reasons, the CIOT queries 'whether it is sensible to begin exploring alignment of taxable profits with the accounts in relation to smaller companies'.
The institute' goes on to suggest that 'it may be preferable for the Government to consider… a system where businesses are not encouraged to think about tax'. This, it adds could be achieved 'by aligning taxable profits with the accounts. This would necessarily involve removing all the targeted tax reliefs and the resultant arbitrages between tax and a company's accounts'.
Elsewhere in its response, the organisation recommends that the remit of the Treasury review 'is broadened from that of “simplification”', adding that 'if time and resources are to be allocated to considering this area of taxation, it would seem sensible also to consider the fundamental bases of taxation at the same time — that is methods of calculating tax liabilities which are not dependent on profit'.
In answer to a question about the priority areas in simplifying corporation tax calculations and returns for smaller companies, the CIOT's response recommends 'doing a root and branch review in conjunction with the ongoing consultation on income shifting'.
It then adds that while the Treasury review 'focuses on tax on profits payable by the business', the main tax burden on a small business is PAYE obligations and as such, 'smaller companies are disproportionately vulnerable to compliance action and are seen as a “soft touch” by the employer compliance review teams'.
'For this reason,' remarks the institute, 'a disincorporation relief would be a blessing for a lot of small companies and their owners. In addition, however, PAYE/benefit in kind obligations should be considered as a priority area of review'.
