The UK system of corporation tax is out of date, inappropriate and increasingly irrelevant to the modern business world, at least according to the Chartered Institute of Taxation.

Now calls for a radical overhaul of the tax system are gathering momentum as it becomes increasingly evident that the constraints placed on the economy by the corporation tax system are hindering the ability of the UK to adapt to rapidly changing global market conditions.

Chartered Institute of Taxation: "corporation tax is out of date"

Virtually unmodernised since it was introduced in 1965, corporation tax is riddled with anachronisms, according to the institute, complicating what could be much more straightforward procedures.

It says corporation tax legislation is grafted on to income tax legislation, which dates all the way back to the Income Tax Act 1842.

"A vast number of changes have been made over the years and the result is that, in many cases, the profits on which a company has to pay corporation tax may bear little relationship to its commercial profits, as shown by its accounts drawn up in accordance with the Companies Acts."

Review needed

Heather Self, chairman of the institute's technical committee, says: "We believe the time has come for a fundamental review of the corporation tax regime as a whole.

"In principle, companies ought to pay corporation tax on their commercial profits.

"Perhaps the biggest single step towards aligning taxable profits with accounting profits would be the replacement of capital allowances with a deduction for commercial depreciation."

The problem the institute is highlighting is that, because tax treatment and accounting treatment are not the same, unnecessary complications are built into the tax system.

For example, in calculating its profits, a company may claim the cost of pens and paper as they are used, while the cost of its computers might be spread over three years and the cost of buildings over 25 years.

Having done that, the company has to start again and go through a completely different procedure to arrive at the taxable profit, which could be bigger or smaller than the profit figure shown in its accounts.

Heather Self says: "We need an overall approach to simplifying the system. For example, at the moment there are pages and pages of guidance from the Inland Revenue over what constitutes a commercial building."

Ways of working

At the same time, there are calls for radical changes to the tax system to take into account modern ways of working.

Ernst & Young: report on work/life balance

A report by accountants Ernst & Young says finding a balance between work and other areas of life is not a luxury - it is a necessity.

The report addresses the problems of employees who are "money-rich but time-poor", with particular emphasis on the rising number of women in the workplace.

There is no doubt that the development of e-commerce and the changing global economy are demanding that companies become more innovative and adaptable.

This, combined with the flexible employment needed by many people, such as working mothers and contract workers, means the current tax system could be a major barrier to the realisation of the government's aim to make the UK a leader in the global economy of the future, which is being driven by the little understood needs of the IT industry.

The report highlights "the need for the government to rethink how tax influences working patterns, and to acknowledge that significant change is necessary to ensure employees and employers can make flexible working the way forward in a rapidly changing economy."

Sarah Hyde, head of Ernst & Young's Employer Solutions Practice, suggests a number of tax changes to encourage flexible working:

• a flat rate working cost tax relief should be introduced for all employees

• as a first step (or an alternative if a full working cost tax relief was not politically acceptable), the expenses (capped if necessary) of professional childcare should be tax deductible against earned income

• radical tax incentives to encourage telecommuting

• a major extension of the tax deduction for workplace nurseries

• reductions in employer National Insurance Contributions to reward employers who demonstrate their commitment to flexibility