Digitize taxation for corporate tax

The government’s Making Tax Digital (MTD) program aims to move the UK towards a fully digital tax system, which should allow taxpayers to easily keep digital records and report their tax debts and payments in real time.

The government is confident this will both reduce taxpayer error and increase the information available to HM Revenue & Customs (HMRC).

Following the roll-out of MTD for VAT, which started in 2019, the government is now in the process of extending MTD to other taxes. The BAT for Corporate Income Tax (BAT ITSA) is expected to be introduced from April 2024; BAT deadlines for corporation tax (BAT CT) are however less certain.

The position so far

In November 2020, HMRC published a consultation on the design of the MTD CT. The proposals set out in this document are expected to have an impact on the 3 million enterprises dependent on the CT, including non-resident companies and other enterprises. The plans will not affect businesses subject to income tax, such as sole traders, who will instead fall under the MTD ITSA scheme.

The government’s response to the consultation, published in November 2021, confirms that, despite delays to the MTD ITSA programme, it still intends to move forward with MTD CT. The response also contains a welcome confirmation that, although the basic requirements reflect those of MTD ITSA, the government recognizes the need for MTD CT requirements to be flexible enough, so that they are applicable to all sizes of business. and groups.

Since the majority of companies already submit returns online, there will likely be a very limited set of exclusions from MTD CT. These would include all businesses that are already exempt from filing corporate tax returns online, and are likely to also include businesses that have an insolvency practitioner acting on their behalf.

MTD CT Schedule

The timing of the switch to MTD CT is currently unclear. The 2020 consultation document suggested that the mandate would not be before April 2026: given that HMRC (and software development) resources are currently focused on MTD ITSA, it is likely that we will see this date pushed back. A later start date would be welcome to allow business and government to learn from MTD ITSA, allow more time to resolve outstanding technical issues presented by MTD CT, and give businesses sufficient time to prepare for changes.

Digital recording

The switch to MTD would require all affected companies to keep their accounting and transaction records in digital format. BAT-compatible software would allow businesses to keep digital records and provide data from those records to HMRC in an approved and secure format. Every quarter, businesses will need to submit an update of their income and expenses to HMRC, categorized by type. However, there will be no requirement to make any tax or accounting adjustments to these figures for quarterly reporting purposes, although companies may do so on an optional basis.

Quarterly reports

For accounting periods of 12 months, quarterly declarations must be made one month after the end of the quarter. For accounting periods that cannot be split into three-month quarters, companies will have the option of filing a “short” update to complete the period or splitting the next update into two accounting periods.

In addition to financial data, it is proposed that companies also report certain non-financial data under BAT, such as type of company, industry classification and group structure.

The consultation raised the question of whether and how quarterly reporting requirements should apply to very large companies (with profits over £20m) which are currently required to pay corporation tax in instalments quarterly during their accounting period. A key driver of quarterly reporting is to support near real-time digital record retention requirements, and the government recognizes that larger companies will already do this. Further consultation is expected in this area before MTD CT becomes a reality, with the government saying it wants to ensure any obligations are “proportionate and necessary”.

The consultation also considered whether quarterly reporting requirements should be waived for the following types of businesses:

• Dormant companies.
• Multinational corporate groups required to comply with country-by-country reporting requirements.
• Foreign permanent establishments of UK companies where an election for the foreign permanent establishment exemption has been made.
• Certain controlled foreign companies

No final conclusions have yet been reached on this, so we expect to see further consultation in these areas as the project progresses.

Annual inspection deposit

On an annual basis, as at present, companies will have to submit a CT dossier containing the final calculated CT liability to HMRC, together with annual accounts in iXBRL format. While the vast majority of businesses already file their CT returns and accounts electronically, under MTD they will need to use MTD compatible software, or related software, to make accounting and tax adjustments to their digital records before providing them to the HMRC.

BAT for groups of companies

The 2020 consultation asked whether business groups should be able to choose a designated company to retain digital records and make updates on behalf of the group. Respondents to the consultation made it clear that there is no single answer to this question: some groups would benefit from being able to use a designated company in this way, while others would find it easier to complete company-by-company BAT obligations. It is also likely that some groups would benefit from the ability to nominate more than one company. This is another area where more consultation is expected.

Next steps

Given the continued uncertainty regarding both the timeline and the detailed requirements for MTD CT, we are not suggesting any company take any steps to prepare at this time. However, we recommend businesses keep abreast of developments in the area and engage with HMRC and the government when the opportunity arises to help ensure that MTD CT provides a viable solution for all types of businesses and groups.

If you have any questions about MTD for corporation tax, please get in touch with your usual contact at Saffery Champness or speak to Alison Hobbs.

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