Making Tax Digital for Corporation Tax
Susan Cattell gives an introduction to the HMRC consultation on Making Tax Digital for Corporation Tax – ICAS will be responding and would welcome views on the proposals.
HMRC issued a consultation on Making Tax Digital for Corporation Tax on 12 November 2020. ICAS participated in informal discussions with HMRC about large and complex businesses in the summer of 2017, so the formal consultation has been expected for some time and many companies will undoubtedly have views on the proposals. HMRC now has experience with the implementation of MTD for VAT and we hope that it will use this to avoid repeating some of the problems agents and businesses experienced with the VAT rollout.
One of the main drivers behind MTD for CT (as for MTD for VAT and ITSA) is to reduce the part of the Tax Gap relating to error, and ensure businesses pay the right tax. There are mixed views on whether these aims will be achieved. HMRC’s March 2020 review of MTD for VAT noted that it was too early to evaluate the impact MTD will have on the Tax Gap. However, some agents have reported problems with VAT software allowing/encouraging clients to treat transactions incorrectly.
The intention is that MTD will apply to all entities within the charge to CT (subject to some limited exemptions). The consultation proposes that the core MTD requirements will be:
- Maintenance of records (eg records of income and expenditure) digitally.
- Use of MTD compatible software to provide regular (quarterly) summary updates of income and expenditure to HMRC – but there will be some entities which will not need to do this.
- Submission of an annual CT return using the MTD compatible software.
For some entities which do not already use software, this will mean implementing an MTD compatible accounting software system. Entities which use several software systems may need to ensure that these can communicate with each other digitally.
The consultation recognises that approximately 85% of entities within the charge to CT rely on agents to help them fulfil their tax obligations and notes that HMRC is committed to learning lessons from agents who experienced difficulties in helping clients transition to MTD for VAT.
Digital record keeping
The Companies Act 2006 requires entities within the charge to CT to keep any accounting records which may be needed to explain the company’s transactions, disclose its financial position and to prepare accounts. Companies are also required to maintain records to allow them to prepare a correct and complete Company Tax Return.
MTD will mean that these records must be kept digitally, with transactions captured as near to real time as possible. As far as transactions are concerned it is proposed that the minimum data which would need to be kept for each transaction would be the date, the amount, and the category. For smaller businesses the government believes that the categorisation requirements should be similar to those for MTD for income tax – there is a long list of suggested items, including trading income, income from various other sources and numerous categories for expenses.
Comments are specifically requested on whether groups would value the ability to keep digital records at group level and whether a mixed approach (with some entities within the group maintaining their own digital records) would offer any benefits.
The consultation further proposes that digital record keeping would also be required for certain non-financial data: type of company, standard industry classification, details of property addresses, details of the SAO and a breakdown of the group structure identifying all group members within the charge to CT. Views are requested on the administrative burdens of recording and providing this data through MTD software.
Quarterly reporting will be one of the core features of MTD for CT – as for MTD for VAT and income tax. It is intended to underpin digital record keeping (as close to real time as possible) and allow businesses to understand their emerging tax position and plan accordingly.
Each quarterly update will consist of summaries of information drawn from the expense and income categories maintained in software; MTD compatible software will create the updates from the information in the underlying digital records.
One question specifically asks whether groups which maintain digital records at a group level would also want to submit quarterly updates through a nominated entity.
The intention is for the update cycle to be linked to the entity’s accounting period. Where an accounting period is not divisible into quarterly periods, the entity would have the choice of providing a separate update to conclude the period, or waiting and splitting the next update between two accounting periods.
Very large companies
Companies within the payment regime for very large companies (ie broadly those with profits at an annual rate in excess of £20 million) already pay CT in quarterly instalments during their accounting period. They are also within HMRC’s Business Risk Review process and have HMRC Customer Compliance Managers so HMRC has enhanced levels of tax assurance. It is therefore proposed that these companies would not need to provide quarterly updates – but would still be required to keep digital records and submit their end of year return using MTD compatible software.
One of the principles set out for very large companies envisages that entities would move between the payment regime for very large companies and MTD quarterly updates, but it is not currently clear how this would work. The consultation notes that some entities will be on the edge of the profits threshold, either because their profits are consistently around that level, or because of profit fluctuations. Large companies could also fall below the threshold in a period when they made losses. The government recognises that varying the MTD requirements according to the annual rate of profit could impose additional burdens on these businesses so is seeking views on the impact and how the proposed principles could be applied to this group.
Accounting and tax adjustments
The consultation proposes that accounting and tax adjustments should be optional for quarterly updates. It goes on to note that there are many claims for incentives, reliefs and allowances which can be made. Over time HMRC intends to replace forms and other processes for dealing with these with MTD compatible software; this will provide guidance and tailored assistance. Views are invited on which forms and processes for claims businesses would most like to see digitised and also on the guidance and/or tailored assistance that would help.
Establishing the final CT liability
The majority of Company Tax Returns are already filed electronically. MTD will not substantially change that, or the requirement to supply accounts prepared under the Companies Act.
However, it is important to note that the consultation states that the “digital records kept within the entity’s software may also form the prime record for their accounts. To comply with the obligations of MTD, accounting and tax adjustments relating to the period will need to occur either in that software or alternatively in linked software.”
The government intends that entities will use their MTD compatible software to provide their Company Tax Return direct to HMRC - to include (but not limited to) the data provided through the CT600 and supplementary pages as well as the iXBRL tagged accounts and computation. This may mean that some entities will need to update or acquire new software to enable the link to HMRC.
For groups which choose to meet their MTD obligations for digital record keeping and quarterly updates through a nominated entity, the government proposes that the same nominated entity would establish CT liabilities on behalf of group members. However, it would welcome views on this proposed alignment.
The government is also considering whether MTD for CT provides the opportunity to align filing dates for tax and company law purposes by bringing forward the Company Tax Return filing date. Comments are requested on whether this would be appropriate – and what difficulties might arise.
Users of the CATO (Company Accounts and Tax Online) free service, currently provided by HMRC for small entities, should note that the government believes that over time the maturity of the software market means that it will be appropriate to withdraw CATO. Comments on the impact of withdrawal are requested.
Special cases and exemptions
There will be an exemption for the digitally excluded. Where HMRC has previously agreed that a person is digitally excluded from one set of MTD obligations, for example MTD for VAT, it will also be exempt from MTD for CT.
For insolvent companies, the government proposes that where the insolvent entity retains its responsibility to file an online Company Tax Return, then MTD for CT obligations would continue to apply. However, where an insolvency practitioner has been appointed to act on behalf of a company and an existing exemption from online filing applies it would be unreasonable to require compliance with MTD for CT. MTD obligations would therefore cease to apply at this point.
The consultation seeks views on whether charities, CASCs and other not for profit organisations should be within the scope of MTD for CT. The government is clearly inclined to bring all charities within the scope where they have income within the charge to CT and are required to complete a Company Tax Return. It is therefore asking for an explanation of why an alternative approach might be necessary for charities and what criteria should be applied to assess eligibility for this.
Following the consultation, there will be continued refinement of the MTD for CT requirements which will involve working with stakeholders. There will then be an opportunity to take part in a voluntary pilot - it is proposed that this will begin in April 2024, with mandation to follow from 2026 at the earliest.
ICAS would like your input
ICAS will be responding to the consultation. We envisage that smaller entities and multinationals may have very different views on the proposals so we would like to hear from both – and from their advisers. Please send us your feedback and comments by emailing email@example.com.