Reform

Chas Roy-Chowdhury reports on new EU proposals that promise to do away with the headache of business tax

European Union finance ministers are due to meet in the second week of September to consider two EU Commission papers that discuss ways to take forward the labyrinthine task of tax reform throughout the region. This article will draw readers' attention to one of those papers, which details an innovative proposal that appears to have by-passed the UK Government thus far.

The Commission's 'Home State Taxation' (HST) proposal has the potential to improve significantly the tax environment for UK businesses and enable small companies to take much greater advantage of the single market. It is also non-contentious, as it is distinctly separate from the issue of tax harmonisation.

At present the European single market is, in practice, open only to large businesses, as they have the necessary resources to operate within the 25 different tax regimes of the European Union.

Under an HST system, however, businesses would not be required to calculate their tax obligations using the tax systems of every country in which they operate, but instead be able to use their domestic tax systems to calculate their taxable profits. Under one possible scenario, small companies would file their tax returns solely with their domestic revenue authorities and the authorities would, in turn, deal directly with the payment of tax to those other EU states also entitled to tax a slice of the profits.

This, for example, would see a UK small firm which decides to trade in Germany use the UK system to calculate its taxable profits, yet pay the tax at German rates. This process would remove the need to get to grips with German Corporate Income Tax rules and language. While the small company may still need to make other statutory filings in Germany, the removal of the corporation tax element would significantly lighten its regulatory and administrative burdens.

There is a further advantage with HST in that it can be implemented quickly, without the need to wait for all EU member states to agree to it. Interestingly, it appears to be the EU fiscal authorities and not their political masters which have been the main stumbling block to agreement to date. This makes it all the more important that those in favour of HST promote its existence and campaign for its adoption directly to the appropriate politicians in individual member states.

A pilot project, which will involve a limited number of companies and states, is expected to take place in the next 18 months. If successful, the HST system would be made available across the EU. Those states wishing to participate in the HST system would be greatly helping their small businesses to operate in what will be the world's largest single market by 2004, and UK SMEs cannot afford to be left out.

The pilot will be a significant project. For example, an issue which will need to be resolved at the pilot's outset will be the definition of a small company. There is currently no EU-wide agreed definition of a small company and the £5.6m turnover limit used to define a small company for audit threshold purposes might be too high for many member states, especially the smaller ones, to live with.

HST is not about tax harmonisation, nor the loss of fiscal control - it is a major issue of UK competitiveness. The Government should not let political dogma get in the way of helping the UK's small companies.

Chas Roy-Chowdhury is ACCA's head of taxation. As chair of the Direct and Indirect Tax Committee of UEAPME, he is actively involved in European level taxation policy discussions.