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In August 2002, the government issued a consultation document on further reform to the corporation tax system.1 This consultation is primarily concerned with the calculation of taxable income. The rules of the corporation tax system have evolved over many decades. The consultation is a welcome opportunity to look again at the rules, to see where they are now out of date or inconsistent for no discernible purpose and to update them where necessary.

But this consultation goes beyond a mere tidying of the tax system. Underlying the proposals is a clearly discernible direction for reform of the corporation tax system. The aim is to align taxation and company accounts. Although the consultation addresses three topics capital assets, the schedular system and the distinction between trading and investment companies the major issues revolve around the treatment of assets and losses. In the former case, a comprehensive alignment is raised as a possibility. In the latter case, the proposals represent a first step along a road that could eventually lead to taxation on a tax consolidated basis and hence the reduction or elimination of the existing restrictions on how losses can reduce taxable profits.

This response focuses on these larger issues. It aims to explain the main proposals contained in the consultation, to provide some empirical evidence on the scale of possible changes and to make some comments on the wider policy issues that these proposals raise. At this stage of the consultation process, we retain an open mind on the merits of any final reform package, not least because there is a wide range of alternative packages.