Making Tax Digital for Corporation Tax: ICAS responds to the consultation
Susan Cattell outlines the ICAS response to the important consultation on Making Tax Digital for Corporation Tax.
The taxpayer population which will be affected by MTD for CT covers a very wide range, from significant multinational enterprises to micro-entities - and not for profit organisations. ICAS held a meeting with HMRC and the consultation was also discussed with our OMB and International and Large Business Taxes Committees and at a well-attended Ask ICAS webinar. Valuable feedback also came from members working in the charity sector and in business.
Our response to the consultation highlights that it will be very important to build flexibility into the regime – and to extend the scope of the proposed exclusions from part or all of MTD for CT – to ensure that disproportionate cost and administrative burdens are not imposed, for little benefit to taxpayers or to HMRC.
Larger and more complex entities
The consultation notes that despite the increasingly digital environment the amount of tax lost annually through avoidable error stands at £8.5bn, of which HMRC estimates that around £2.1bn relates to CT alone. HMRC believes that “extending MTD to CT will help reduce the volume of errors by requiring digital records; developing the tax administration in ways which reduce opportunities for error, carelessness and deliberate non-compliance and help to tackle the tax gap”.
The emphasis on reducing errors through digital records means that much of the detail in the consultation is more relevant to smaller entities. This leaves unanswered questions and gives rise to potential problems for larger entities which already keep digital records – particularly for those not quite large enough to be within the QIPs ‘very large’ category.
ICAS believes it would be appropriate to set the threshold for quarterly updates at a lower level than currently proposed. No company which is already within the QIPs regime, or which falls within the Senior Accounting Officer regime or has an HMRC Customer Compliance Manager and is within the Business Risk Review process, should be required to file quarterly updates with HMRC; it is difficult to see any benefit either to HMRC or to these companies from filing raw data on a quarterly basis.
However, it would be helpful to set the threshold for filing quarterly updates by reference to something other annual profits; it will not be feasible for entities to switch in and out of quarterly updates because profits fluctuate around the threshold or because a loss arises in an accounting period. Consideration should be given to setting the threshold by reference to factors such as turnover and balance sheet – but with the aim of excluding all entities in the categories mentioned above.
As set out in the consultation document, HMRC already has enhanced levels of tax assurance for large companies through Customer Compliance Managers and the Business Risk Review process. Additionally, many of these companies will be within the Senior Accounting Officer regime and will be filing Country by Country Reports. Other regulatory and reporting requirements are also being introduced, which may include new financial reporting controls under a “UK Sarbanes-Oxley” regime.
Adapting existing systems and processes for MTD, so that the year-end CT return can be generated directly from underlying accounting systems, will be costly and impose administrative burdens (and in some cases may be impossible due to the complexity of systems and tax affairs) - at a time when many of these large companies will be trying to rebuild following the pandemic. No benefits for either HMRC or the companies themselves are set out in the consultation document to justify this; consideration should be given to excluding the largest companies from MTD altogether.
Digital links and calculations outside software
The consultation does not discuss linking between different software systems, although paragraph 7.18 notes that “larger and more complex entities will need to ensure digital links exist where data flows between multiple applications or systems.” A universal soft landing period for digital links for CT (similar to the one for MTD for VAT) would be useful but may not be essential, in view of the lead time for the introduction of MTD for CT.
However, there should be a process for requesting a grace period when full digital links will not be required. This would cover entities with complex systems which need more time prior to the commencement date for MTD for CT and would also cover situations where a temporary grace period is required, for example, where a new subsidiary is acquired, and it takes time to integrate digital systems.
HMRC should also confirm that it will be acceptable for complex calculations and adjustments to be undertaken outside the MTD for CT software – as for MTD for VAT (see VAT Notice 700/22: Making Tax Digital for VAT, Example 7 – Adjustments, journeys and transfers outside of software).
Smaller and micro-entities
There should be a light touch approach to late filing penalties for the first year of implementation – to give businesses time to adapt.
Some businesses may wish to change their VAT stagger to align (or in some cases to avoid aligning) the filing of VAT and CT updates. It is essential that this should be possible.
ICAS envisages that many small entities may wish to use spreadsheets, combined with bridging software to meet the requirements of MTD for CT. This is likely to reduce costs in some cases, compared to using a full software package. The consultation proposes to maintain the position established for Income Tax and VAT by accepting a range of software solutions – but it is not clear whether this would include using a combination of spreadsheets and bridging software. This needs to be clarified at an early stage so that preparations for MTD for CT can be undertaken with certainty.
The consultation suggests that CATO (the free HMRC product for filing with HMRC and Companies House) will be withdrawn. If that happens, it should be replaced with an alternative free HMRC product, designed to meet the MTD for CT requirements and continuing to allow joint filing with Companies House. Alternatively, HMRC should ensure that an equivalent free product is available from third party software providers.
Charities and not for profit organisations
ICAS agrees with the proposal that charitable trading subsidiaries should be within the scope of MTD for CT, to maintain parity with other trading entities with whom they may be in competition. However, we disagree with some of the other proposals for charities.
There should be exemptions for some charities and other not for profit organisations, particularly smaller ones. The consultation suggests that charities may miss out on the benefits of going digital, if excluded from MTD for CT, but feedback we have received indicates that there are many cases where it is difficult to identify any benefits to HMRC or charities from including them. Consideration should also be given to excluding some larger charities, which already keep digital records, from the requirement to provide quarterly updates.
Flexibility for entities of all sizes
There should be considerable flexibility in the approach to digital records. Entities of all sizes, which already keep digital records, using categories suitable for their tax and business requirements, should not be forced to change their systems solely to comply with an arbitrary MTD list. Charities and some other entities with non-standard requirements may be using bespoke or specialist software which it would be costly and disruptive to change.
Similarly, groups of companies should be able to keep records, submit quarterly updates (where relevant) and submit end of year returns in a way which reflects their group structure and requirements. We have been given examples of a range of different approaches to group record keeping and reporting. MTD for CT needs to accommodate these; a one-size fits all approach to nominated entities will not work and could impose significant cost and administrative burdens.
The filing dates for tax and company law purposes should not be aligned. Finalised accounts are the starting point for the tax computations; once these are available extensive additional work is often required before the tax return can be submitted. For most companies and their agents, aligning the filing dates would cause considerable difficulties, requiring additional staff resources and imposing extra costs. It is important that a gap is retained between the accounts filing date and a (later) CT filing date.
Timeline for MTD for CT
The consultation confirms that MTD for CT will not be mandatory before April 2026 and HMRC proposes that a voluntary pilot will begin in April 2024.This suggests that some lessons have been learned from the implementation of MTD for VAT.
However, all the requirements for MTD for CT need to be set out in legislation far enough in advance for software developers and businesses to have time to implement them in their software. HMRC should also provide the IT specifications and begin working with software providers at an early stage, to ensure that problems can be resolved before the mandatory implementation date (and preferably in time for most businesses to be able to join the pilot). Large and complex entities generally require 18 months to 2 years to make changes to their systems – it is therefore essential that the late finalisation of MTD for VAT legislation and IT specifications, which caused significant problems, is not repeated.
ICAS would like your feedback
We welcome input from members about any tax consultations or calls for evidence. We are also currently looking for input on your experiences of dealing with HMRC – particularly in the light of HMRC’s commitments in the HMRC Powers evaluation report and the standards set out in the new HMRC Charter. ICAS belongs to the Charter Stakeholder group which will be giving input in April on how HMRC is performing against the standards, for inclusion in the Charter Annual Report. Please send us your feedback by emailing email@example.com.