PRIVATE COMPANY LIMITED BY SHARES

AN ANALYSIS OF TAX ACCOUNTING RULES IN THE UNITED

KINGDOM AND GERMANY

by

Thilo Grabo

---

Table of Contents

I

TABLE OF CONTENTS

ABBREVIATIONS

V

1.

INTRODUCTION

1

1.1.

PURPOSE OF STUDY 1

1.2.

SCOPE OF THE OBJECT OF INVESTIGATION 3

1.3.

OUTLINE OF THE STUDY 3

2.

FUNDAMENTALS

5

2.1.

INSTRUMENTS FOR THE EXECUTION OF INTERNATIONAL TAX COMPARISON 5

2.1.1. PREFACE 5

2.1.2.

QUALITATIVE METHODS OF INVESTIGATION 6

2.1.2.1.

COMPARISON OF LEGAL RULES 6

2.1.3.

QUANTITATIVE METHODS OF INVESTIGATION 7

2.1.3.1.

CASUISTIC SIMULATION OF ASSESSMENT 7

2.1.3.2.

COMPARISON OF TAX RATES 8

2.1.3.3. ANALYSIS

OF EMPIRICAL DATA 9

2.1.3.4.

EFFECTIVE TAX RATES 9

2.1.4.

CHOICE OF A PARTICULAR INVESTIGATION METHOD 11

2.2.

THE TAX SYSTEM AND INFLUENCES OF TAXATION 13

2.2.1.

PRINCIPLES OF TAXATION 13

2.2.2.

SOURCES OF THE TAX LAW 13

2.2.3.

GENERALLY ACCEPTED ACCOUNTING PRACTICES 16

2.2.4.

OBJECTIVE AND PURPOSE OF THE COMMERCIAL AND THE TAX BALANCE

SHEET 18

2.3.

CHARACTERIZATION OF THE CORPORATION TAX 21

2.3.1. PERSONAL

TAX

LIABILITY 21

2.3.2.

BASIS OF ASSESSMENT FOR THE CORPORATION TAX 23

2.3.2.1.

ADJUSTING THE ACCOUNTING PROFIT AND VALIDITY OF THE

AUTHORITATIVE PRINCIPLE 23

2.3.2.2.

SCHEME FOR THE CORPORATION TAX COMPUTATION 25

2.3.3.

PERIOD OF DETERMINING INCOME FROM TRADE 28

2.4. FURTHER

PROCEEDING 29

---

Table of Contents

II

3.

COMPARISON OF CORPORATION TAX ASSESSMENT BASES I: BALANCE SHEET

ITEMS

30

3.1. PREFACE 30

3.2.

CONCEPTUAL FRAMEWORK AS CORE ELEMENT FOR THE DETERMINATION OF

INCOME 30

3.2.1. BASIC

ASSUMPTIONS 30

3.2.2.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS 32

3.3.

GENERAL TREATMENT OF BALANCE SHEET ITEMS 36

3.3.1. RECOGNITION

CRITERIA 36

3.3.2. VALUE MEASURES 39

3.4. ASSETS

SIDE 48

3.4.1. INTANGIBLE

ASSETS (NON-CURRENT) 48

3.4.1.1. DEFINITION 48

3.4.1.2. RECOGNITION 51

3.4.1.3. MEASUREMENT 51

3.4.1.4. EXCURSUS:

DISPOSALS 55

3.4.1.5. MAJOR

SIMILARITIES AND DIFFERENCES 55

3.4.2. TANGIBLE ASSETS 58

3.4.2.1. PREFACE 58

3.4.2.2. PROPERTY 59

3.4.2.2.1. DEFINITIONS 59

3.4.2.2.2. RECOGNITION 61

3.4.2.2.3. MEASUREMENT 61

3.4.2.2.4. EXCURSUS:

DISPOSAL 63

3.4.2.2.5. MAJOR

SIMILARITIES AND DIFFERENCES 64

3.4.2.3.

MACHINERY, PLANT AND EQUIPMENT 66

3.4.2.3.1. DEFINITON 66

3.4.2.3.2. RECOGNITION 70

3.4.2.3.3. MEASUREMENT 70

3.4.2.3.4. EXCURSUS:

DISPOSAL 76

3.4.2.3.5. MAJOR

SIMILARITIES AND DIFFERENCES 78

3.4.3.

INVESTMENTS IN SECURITIES 82

3.4.3.1. DEFINITION 82

3.4.3.2. RECOGNITION 82

3.4.3.3. MEASUREMENT 84

---

Table of Contents

III

3.4.3.4. EXCURSUS:

DISPOSAL 87

3.4.3.5. MAJOR

SIMILARITIES AND DIFFERENCES 88

3.4.4.

TRADING STOCK (INVENTORIES) 90

3.4.4.1. DEFINITION 90

3.4.4.2.

RECOGNITION AND MEASUREMENT 92

3.4.4.3.

SELLING AND PROCESSING 96

3.4.4.4. MAJOR

SIMILARITIES AND DIFFERENCES 96

3.4.5. TRADE

RECEIVABLES 98

3.4.5.1. DEFINITION 98

3.4.5.2. RECOGNITION 99

3.4.5.3. MEASUREMENT 99

3.4.5.4. MAJOR

SIMILARITIES AND DIFFERENCES 102

3.5. LIABILITIES

SIDE 103

3.5.1. PROVISIONS 103

3.5.1.1. DEFINITION 103

3.5.1.2.

RECOGNITION AND MEASUREMENT 107

3.5.1.3. MAJOR

SIMILARITIES AND DIFFERENCES 111

3.5.2. LIABILITIES 114

3.5.2.1. DEFINITION 114

3.5.2.2.

RECOGNITION AND MEASUREMENT 116

3.5.2.3. MAJOR

SIMILARITIES AND DIFFERENCES 122

4.

COMPARISON OF CORPORATION TAX ASSESSMENT BASES II: ITEMS OF INCOME

STATEMENT

125

4.1. PREFACE 125

4.2. REVENUES 125

4.2.1.

GENERAL TREATMENT OF REVENUES 125

4.2.2. REVENUE

INCOME 128

4.2.3.

OTHER OPERATING INCOME 129

4.2.4.

INCOME FROM FINANCIALS AND INVESTMENTS 134

4.2.5.

CHANGE IN INVENTORY/ CAPITALISED SERVICES 139

4.2.6.

EXCURSUS: CHARGEABLE GAINS 140

4.3. DEDUCTIONS 142

4.3.1.

GENERAL TREATMENT OF DEDUCTIONS 142

4.3.2.

EXPENDITURE OF PURCHASED GOODS, RAW MATERIALS AND SUPPLIES 145

4.3.3. PERSONNEL

EXPENDITURES 146

---

Table of Contents

IV

4.3.4. DEPRECIATION/

CAPITAL ALLOWANCES 147

4.3.5.

OTHER OPERATING EXPENDITURES 148

4.3.6.

EXPENDITURE FROM FINANCIALS AND INVESTMENTS 160

4.3.7. DIRECT

TAX 162

4.3.8.

OTHERS: EXPLICIT NON-DEDUCTIBLE OR RESTRICTED EXPENDITURES 163

4.3.9. CHARGES

ON

INCOME (DONATIONS) 164

4.4.

EXCURSUS: TREATMENT OF LOSSES 165

5.

COMPUTATION OF TAX LIABILITIES

169

5.1. CORPORATION

TAX 169

5.1.1. PREFACE 169

5.1.2. TAX

RATES 170

5.1.3.

SPECIAL TAX RELIEFS 175

5.2.

TRADE TAX (ONLY IN GERMANY) 177

5.2.1. PERSONAL

TAX

LIABILITY 177

5.2.2.

MODIFICATION OF TAX ASSESSMENT BASE 177

5.2.3.

SPECIAL FEATURES OF DETERMININING TRADING PROFIT 178

5.2.3.1.

ADDITIONS 178

5.2.3.2.

REDUCTIONS TO TAXABLE BASIS 180

5.2.4.

CALCULATION OF TRADE TAX 181

5.2.5.

EXCURSUS: TREATMENT OF LOSSES 182

6.

SUMMARY AND CONCLUSION IN TERMS OF THESES

184

6.1. PREFACE 184

6.2.

BALANCE SHEET ITEMS 185

6.3.

ITEMS OF THE INCOME STATEMENT 191

6.4. TAX

RATES 198

6.5. FINAL

WORD 202

ANNEX

XVI

LIST OF LITERATURE

XLV

LIST OF LEGAL SOURCES

LIX

---

Abbreviations

V

ABBREVIATIONS

ACCA

Association of Chartered Certified Accountants (UK)

AG

Aktiengesellschaft

(German Stock Corporation)

or Application Guidance

AIA

Annual Investment Allowance

AO

Abgabenordnung

(German Tax Code)

approx. approximately

Art. Article

ASB

Accounting Standards Board

ATC

Annotated Tax Cases (GEE & Co. (Publisher) Ltd., South

Quay Plaza, 183 Marsh Wall, London E14 9FS)

b/f brought

forward

BAK

BAK Basel Economics

BB

Betriebs-Berater (Business Advisor ­ magazine)

BBK

Buchführung, Bilanzierung, Kostenrechnung

(Accounting and Cost Accounting ­ magazine)

BC

Basics for Conclusions

BDI

Bundesverband der Deutschen Industrie

(Federal Association of the German Industry)

BewG Bewertungsgesetz

(German Valuation Law)

BIM

Business Income Manual (HMRC)

---

Abbreviations

VI

BMF

Bundesminister der Finanzen

(German Federal Minister of Finance)

BTC

British Tax Cases (CCH Editions Ltd., Telford Road, Bicester,

Oxon OX6 0XD)

c/f carrying

forward

CA

Capital Allowance Manual (HMRC)

CAA

Capital Allowances Act (UK)

CEMA

Customs and Excise Management Act (UK)

Cf.

Confer

CFM

Corporate Finance Manual (HMRC)

CGM

Capital Gains Manual (HMRC)

CIRD

Corporate Intangible Research and Development Manual

(HMRC)

CTM

Company Taxation Manual (HMRC)

DBW

Die Betriebswirtschaft

(Business Management ­ magazine)

DRS

Deutscher Rechnungslegungsstandard

(German Accounting Standard)

DV Durchführungsverordnung

(German Implementation Regulations)

e.g. for

example

EATR

Effective Average Tax Rate

EBITDA

Earnings before Interest, Tax, Depreciation and Amortisation

EMTR

Effective Marginal Tax Rate

---

Abbreviations

VII

ErbStDV Erbschaftsteuerdurchführungsverordnung

(German Inheritance and Gift Tax Law Implementation

Regulation)

ErbStG Erbschaftsteuergesetz

(German Inheritance and Gift Tax Law)

EStDV

Einkommensteuerdurchführungsverordnung

(Income Tax Implementation Regulation)

EStG

Einkommensteuergesetz

(German Income Tax Law)

EStH

Einkommensteuer-Hinweise

(German Income Tax Ordinance)

EStR

Einkommensteuerrichtlinie

(German Income Tax Guidelines)

et al.

and others

et. seq.

and the following (singular)

et. sqq.

and the following (plural)

etc.

et cetera

F.

Framework

FA

Finance Act

FGO

Finanzgerichtsordnung

(German Code of Practice for Financial Courts)

FIFO

First-in, First-out­Method

FRED

Financial Reporting Exposure Draft

FRS

Financial Reporting Standard

FRSSE

Financial Reporting Standards for Smaller Entities

---

Abbreviations

VIII

FY Financial

Year

FYA

First Year Allowance

GAAP

Generally Accepted Accounting Practices

GBP

Great Britain Pound

GewStDV Gewerbesteuerdurchführungsverordnung

(German Trade Tax Implementation Regulation)

GewStG

Gewerbesteuergesetz

(German Trade Tax Law)

GewStR Gewerbesteuerrichtlinie

(German Trade Tax Guideline)

GmbH

Gesellschaft mit beschränkter Haftung

(German Limited Liability Company)

GmbHG

Gesetz betreffend die Gesellschaften mit beschränkter Haftung

(German Law on Limited Liability Companies)

HGB

Handelsgesetzbuch

(German Commercial Law)

HICP

Harmonised Index of Consumer Prices

HM Her

Majesty

HMRC

Her Majesty′s Revenue and Customs (UK)

i.e.

that is

IAS

International Accounting Standard

IASB

International Accounting Standards Board

ICTA

Income and Corporation Taxes Act (UK)

---

Abbreviations

IX

IDW

Institut der Wirtschaftsprüfer

(Institute of German Certified Public Accountants)

IFRIC

International Financial Reporting Interpretations Committee

IFRS

International Financial Reporting Standard

IHTA

Inheritance Tax Act (UK)

INA

Interpretation Act (UK)

ITC

Irish Tax Cases (Government Publications, 1 and 3, G.P:O.

Arcade Dublin 1)

ITEPA

Income Tax (Earnings and Pensions) Act (UK)

ITTOIA

Income Tax (Trading and Other Income) Act (UK)

KPMG KPMG

Deutsche

Treuhand-Gesellschaft

KStDV Körperschaftsteuerdurchführungsverordnung

(German Corporation Tax Implementation Regulation)

KStG

Körperschaftsteuergesetz

(German Corporation Tax Law)

KStH

Körperschaftsteuer-Hinweise

(German Corporation Tax Ordinance)

KStR

Körperschaftsteuerrichtlinie

(German Corporation Tax Guidelines)

LIFO

Last-in, Last-out­Method

LStDV

Lohnsteuerdurchführungsverordnung

(German Wages Tax Implementation Regulation)

LStH

Lohnsteuer-Hinweise

(German Wages Ordinance)

Ltd

Private Company Limited by Shares (UK)

---