These two key points are made in the Association of Corporate Treasurers comments on the HM Treasury and Inland Revenue consultation on Corporation Tax Reform (August 2003).
1. Accounting standards
The general move to fair value accounting and in particular the IASBâs restricted definitions in hedge accounting aspects of IAS39 will introduce more volatility into financial results. It is thus not an appropriate time to seek to align tax with accounts. [If the IASBâs final guidance notes on IAS39 do not follow US GAAP and allow hedge accounting on net hedging within a group of companies, volatility will be grater than with US GAAP compliant accounts.]
The ACT believes that non-financial sector corporates should not be taxed by reference to short-term movements in the value of financial derivatives held as part of a genuine commercial hedging policy â which can be very long-term. Any tax on the 'profit' prior to the ending of the hedge cannot be paid by realisation. The derivatives cannot be realised without destroying the hedges. Tax should be applied at the ending of the hedge.
The proposed treatment of leasing would probably result in the demise of the market.
Smaller companies, particularly those in the start-up, pre-profit, phase would be particularly affected. For such companies, often unable to borrow, leasing can be a key source of finance and the only way they can obtain effective tax relief for their investment.
The ACT urges that the issues recognised by the Government when it introduced R&D tax credits for SMEs be brought into consideration of the leasing changes.
It is sensible that companies in a start-up situation with no taxable profits be put in the same position as regards tax relief as more established companies, for asset finance as they have been for R&D. For asset finance, this might be by continuing an effective leasing regime or a mechanism allowing an election to transfer the benefit of capital allowances to financing institutions.