The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver...

The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience

Wayne Weaver14 March 2006

©2004 Deloitte & Touche LLP2Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006

Historical background –corporate income tax in the UK• Patchwork of regimes

— business profits

— tax depreciation for plant and equipment

— savings and investment income

— income from land and buildings

— capital gains

• Key concepts

— the schedular system

— capital v. revenue

— trading v. non-trading

— no tax consolidation (but special group rules)


Business profits

• Inherently uncertain base

• Courts emphasis on accountancy evidence

— Gallagher v Jones

— Britannia Airways

— Herbert Smith v Honour


Impact of macroeconomic change since 1979

• Abolition of exchange control: 1979

• Big bang and financial liberalisation

• Growth of UK capital markets and the City

• Development of financial instruments


Use of financial reporting measures in recent UK tax legislation• Marine Midland and HMRC statements on forex: 1987

• FOREX and financial instruments rules: 1993-4

• corporate and government debt rules: 1996

• reform of treatment of land etc income: 1998

• business profits and GAAP: 1998

• local currency treatment: 2000

• reform of debt and derivatives rules: 2002

• intangibles: 2002

• management expenses: 2004

• IFRS reforms: 2004-2005


Changes in UK legislative approach

• 1993 FOREX legislation – highly prescriptive

• 1996 (loan relationships) architecture – “authorised” methods

• 1998 use of GAAP for business profits

• 2002 reforms – rationalisation of regimes, reduced use of elections in legislation

• 2004 and 2005 reforms – income as recognised for accounting purposes


UK government policy• HMRC website statement (

http://www.hmrc.gov.uk/practitioners/int_accounting_index.htm)

• “There is merit in aligning…”

— “But…departures”

• Corporate income tax and financial reporting: goal congruence

— descriptive

— alignment with stakeholders

— administrative simplicity

• Fundamental difference – tax concept is normative, not merely descriptive


UK government policy: departures from financial reporting

• Approximately 200 deviations from financial reporting

• Differing objectives

— public policy

— symmetry

— avoidance

— transfer pricing

— fiscal incentives

— capital items

— structural e.g. debt/equity divide

The cash context – realisability and tax capacity

• Importance of continuity: change brings complexity


Adoption of IFRS for corporate income tax reporting: the UK experience to date

• Focus for debate regarding the interface of financial and corporate income tax reporting

• Extensive consultation

• Rationalisation and reform

• Continuity


Rationalisation and reform

• Designation of IFRS as acceptable GAAP for corporate income tax purposes

— anti-arbitrage rule where different GAAPs used in a group

• Debt and derivatives rules – computation in accordance with “ correct” accounts, profits and losses as recognised for accounting purposes

• Functional currency rules modified

• Retain value of R&D tax credits


IFRS issues with limited UK tax implications

• Accounting changes but special UK tax rules apply

e.g. pensions, share options, insurance, investment properties

• Limited accounting changes (from UK GAAP) or changes seen as acceptable for UK tax purposes

e.g. business combinations, intangibles, leases, revenue recognition, provisions


Continuity

• “True reflection”: e.g. inclusion for tax purposes of movements in equity statements

— effectively not following the accounts, triggering (largely avoidable) complexity

• Maintenance of previous hedging rules for tax purposes

— Some (but not all) cashflow and fair value hedges

— net investment hedges

• Special rules to address embedded derivatives e.g. convertible bonds

• Initial resistance to defining transitional rules


UK outcomes• Volume of change

• Extreme complexity – unavoidable?

• Highly prescriptive rules

• Loss of control?

— legislative process

— planning

— compliance

• Uncertainty

— e.g. regarding the financial impact, state of tax law

• Increased compliance

• Cash tax volatility

• Transitional issues


Further help on IAS:

Deloitte website

www.iasplus.com

Wayne [email protected]+44 (0) 20 7303 4105

©2004 Deloitte & Touche LLP15Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006Deloitte & Touche LLP

A member firm ofDeloitte Touche Tohmatsu

The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver...

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