Supplementary memorandum submitted by
Mr John Whiting PricewaterhouseCoopers
It's a good question as to why this (preventing
tax avoidance relating to International Accounting Standards)
was announced today and not included in the (extensive) paper
on IAS issues published at the time of the PBR. I will if I may
just give a quick response.
To be fair, I think that the main reason is
that discussions of this whole area—the transition from
UK GAAP style accounts to IAS-style accounts—has produced
a host of issues, many of which are really only emerging as the
time for implementation draws close & companies focus on the
points. There have been good discussions between industry/advisers
and the Revenue as to how to solve the issues that arise. As you
would imagine, much of the drive is to make sure there is a fair
result on the transition. That may mean that the Revenue starts
from the assumption that any differences that arise would be taxable
(if they are a profit); meanwhile business wants to make sure
that adjustments are allowable (if they are a loss). The Revenue
and business may then want to spread adjustments over a period,
if they are losses and profits respectively—you will appreciate
the differing viewpoints of the two sides!
The package that came out with the PBR included
measures to delay the effect of a lot of transitional changes
to 2006, rather than 2005 when IFRS first takes effect. That was
generally welcomed; however, a business that was about to recognise
a loss with the transition might validly argue that they have
incurred the loss and on general principles should get relief
for it. (Tax law and practice does have as a long-standing and
still-valid principle that one can anticipate losses to some degree
(eg bad debt provisions) but one is not expected to anticipate
profits—though all that is subject to GAAP these days.)
The Press Release suggests that some companies
have tried to take actions to bring forward the losses that will
be recognised for tax purposes. I'm afraid I don't know the detail
of what has been attempted but I assume that the Revenue's attitude
is that if gains are being deferred, so should losses be. Against
that, one goes back to general principles—and that these
are real losses, not artificially-created ones.
The Committee may consider whether issues arising
from the move to IAS have been tackled sufficiently early and
with sufficient resource. Whilst many of the issues arise over
funding arrangements (hence, I guess why much of the work has
been led by Richard Thomas who also leads the Insurance tax team
at the Revenue), this move to IAS is something that affects all
significant businesses in the UK and the tax implications of the
move have been an issue to be addressed for some time.
15 December 2004
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