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The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver 14 March 2006

The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver 14 March 2006. Historic al background –corporate income tax in the UK. Patchwork of regimes business profits tax depreciation for plant and equipment savings and investment income

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The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver 14 March 2006

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  1. The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver14 March 2006

  2. 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)

  3. Business profits • Inherently uncertain base • Courts emphasis on accountancy evidence • Gallagher v Jones • Britannia Airways • Herbert Smith v Honour

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. Further help on IAS: Deloitte website www.iasplus.com Wayne Weaver waweaver@deloitte.co.uk +44 (0) 20 7303 4105

  15. A member firm of Deloitte Touche Tohmatsu Deloitte & Touche LLP

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