The government’s Making Tax Digital (MTD) programme is intended to move the UK towards a fully digital tax system, which is planned to allow taxpayers to easily keep digital records and report their tax liabilities and payments in real time.
It is the government’s belief that this will both reduce taxpayer errors 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. MTD for business income tax (MTD ITSA) is planned to be introduced from April 2024; the timings for MTD for corporation tax (MTD CT), however, are less certain.
The position so far
In November 2020, HMRC released a consultation on the design of MTD CT. The proposals set out in this document are expected to impact the 3 million businesses within the charge to CT, including non-resident companies and other corporates. The plans will not affect businesses who are subject to income tax, such as sole traders, who will instead fall within the MTD ITSA regime.
The government response to the consultation, published in November 2021, confirms that, despite delays to the MTD ITSA programme, it still intends to go ahead with MTD CT. The response also contains welcome confirmation that, although the basic requirements would mirror those of MTD ITSA, the government recognises the need for the requirements of MTD CT to be sufficiently flexible, so that it is workable for all sizes of company and group.
Given that the majority of companies already submit returns online, there are likely to be a very limited set of exclusions from MTD CT. These would include any companies which are already exempt from filing corporation tax returns online, and are likely also to include companies which have an insolvency practitioner acting on their behalf.
Timing of MTD CT
The timing of a move to MTD CT is currently unclear. The 2020 consultation document suggested that mandation would not be before April 2026: given that HMRC (and software development) resource is currently focused on MTD ITSA, it is likely that we will see that date pushed back. A later start date would be welcome to allow businesses and government to learn from MTD ITSA, to give more time to address the outstanding technical issues presented by MTD CT and to allow businesses adequate time to prepare for the changes.
Digital record keeping
The move to MTD would require all affected businesses to keep their accounting and transaction records in a digital format. MTD compatible software would allow businesses to keep digital records and to provide data from these records to HMRC in an approved, secure format. Each quarter, businesses will need to submit an update of their income and expenses to HMRC, categorised depending on their type. However, there will be no requirement to make tax or accounting adjustments to these figures for quarterly reporting purposes, although businesses may do so on an optional basis.
For 12-month accounting periods, the quarterly reports will need to be made one month after the end of the quarter. For accounting periods that cannot be divided into three month quarters, businesses will have the choice of filing a ‘short’ update to complete the period, or splitting the next update across two accounting periods.
As well as financial data, it is proposed that businesses would also report some non-financial data under MTD, such as the company type, the industry classification, and group structure.
The consultation raised the question of whether and how the quarterly reporting requirements should apply to those very large companies (with profits over £20 million) which are currently required to pay corporation tax in quarterly instalments during their accounting period. A key driver for the quarterly reports is to underpin the requirements to keep digital records in close to real time, and the government recognises that the largest businesses will already be doing this. Further consultation is expected in this area before MTD CT becomes a reality, with the government stating that it wants to ensure that all obligations are “proportionate and necessary”.
The consultation also considered whether the quarterly reporting requirements should be waived for the following types of business:
- Dormant companies.
- Multinational enterprise groups that are required to meet country-by-country reporting requirements.
- Foreign permanent establishments of UK companies where an election for foreign permanent establishment exemption has been made.
- Certain controlled foreign companies
No final conclusions have yet been reached on these, so we expect to see further consultation in these areas as the project progresses.
Annual CT filing
On an annual basis, as presently, businesses will need to submit a CT filing containing the final calculated CT liability to HMRC, along 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 linked software, to make any accounting and tax adjustments to their digital records before providing these to HMRC.
MTD for groups of companies
The 2020 consultation asked whether groups of companies should be able to choose a nominated company to keep digital records and make updates on behalf of the group. Respondents to the consultation made it clear that there is no one-size-fits-all answer to this: some groups would benefit from the ability to use a nominated company in this way, whereas others would find it easier to fulfil the MTD obligations company-by-company. There are also likely to be some groups which would benefit from being able to nominate more than one company. This is another area where more consultation is expected.
Given the ongoing uncertainty around both the timing and the detailed requirements for MTD CT, we would not suggest that any company takes action to prepare at the moment. However, we would recommend that companies remain abreast of developments in the area and engage with HMRC and government when the opportunity arises to help ensure that MTD CT provides a workable solution for all types of companies and groups.
If you have any questions on MTD for corporation tax, please get in touch with your usual Saffery Champness contact or speak to Alison Hobbs.