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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)
©2004 Deloitte & Touche LLP3Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
Business profits
• Inherently uncertain base
• Courts emphasis on accountancy evidence
— Gallagher v Jones
— Britannia Airways
— Herbert Smith v Honour
©2004 Deloitte & Touche LLP4Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP5Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP6Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP7Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP8Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP9Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP10Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP11Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP12Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP13Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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
©2004 Deloitte & Touche LLP14Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006
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