Consultation on making tax digital for corporation tax

18 March 2021

HM Revenue and Customs (HMRC) published its consultation on making tax digital (MTD) for corporation tax (CT) on 12 November 2020. The consultation focuses on the key principles of MTD and how they could be implemented for corporate entities. It also provides insight into what may be required of taxpayers, agents and other intermediaries following the implementation of MTD for CT.

This article summarises the consultation proposals and the impact they are expected to have on companies and other organisations that are chargeable to CT.

Proposed design of MTD for CT

The consultation proposes that all entities currently within the charge to UK CT should be within the scope of MTD for CT. It would therefore potentially impact all UK-resident companies and all non-UK companies with activities that are subject to UK CT.

HMRC anticipates that exemptions from MTD for CT will be rare; however, it recognises that there may be circumstances in which MTD for CT should be tailored to the needs of specific types of taxpayer (for example, charities, community amateur sports clubs (CASCs) and other not-for-profit organisations), or for exemptions to apply (for example, those that are digitally excluded or the subject of insolvency proceedings).

It is proposed MTD for CT will require companies to maintain records digitally, rather than on paper, and to capture transactions in ‘as close to real time as possible’ using MTD-compatible software. Companies will be required, as a minimum, to record the date, amount and category of each transaction as it occurs, and the consultation document does not rule out requiring iXBRL (HMRC’s preferred electronic business reporting language) tags to be applied on a real-time, transaction-by-transaction basis.

The consultation suggests that the category to which income and expenses relate will need to be recorded relatively precisely, in line with items typically seen in a detailed profit and loss statement submitted with a company’s tax return.

Companies will also need to provide quarterly updates to HMRC, including a summary of income and expenses for the relevant period, through their MTD-compatible software. Accounting and tax adjustments, which are required for statutory accounts purposes and to establish a company’s tax liability, will be optional for the purposes of quarterly updates.

It is proposed that claims for incentives, allowances and reliefs would still generally be made upon submission of the company’s final annual tax return, although entities will have the option to reflect their expected impact in the quarterly updates provided to HMRC.

It is foreseen that some organisations may opt to meet their digital record keeping requirements at group level, through a nominated group company. In these circumstances that company would also be responsible for quarterly updates and establishing the final corporation tax liability for other individual entities in the group.

The consultation proposes that very large companies that interact with HMRC via the quarterly instalment payment regime for very large companies (ie those with annual profits of £20m or more, divided by the number of group companies) would be exempt from the requirement to provide quarterly updates through MTD for CT. The consultation also proposes aligning the annual tax return submission date and accounts filing dates for most companies, by bringing the company tax return filing deadline forward to nine months from the end of the relevant accounting period.

Timescale

The consultation confirms that use of MTD for CT will not become mandatory before April 2026, although a voluntary pilot is likely to be introduced in April 2024.

Expected impact on companies

If the principles and design proposed in the consultation were adopted, most of those within the charge to corporation tax would need to:

ensure internal accounting systems software is MTD-compatible;
maintain all necessary records digitally;
provide quarterly summary updates to HMRC via MTD-compatible software; and
provide an annual CT return to HMRC via MTD-compatible software.

The consultation document does not indicate that MTD for CT will herald the end of the annual CT return (CT600), as this element still appears to be a key component of the current MTD proposals.

However, it seems likely that these proposals are the first step towards a process where gradually more information will be reported at an earlier stage and eventually the annual CT600 may become redundant.

On this basis, it would be no surprise if the Government eventually moved to align the due dates of corporation tax payments with MTD for CT quarterly reporting dates. It is therefore strange that, at this stage, quarterly reporting through MTD for CT is not expected to be required of companies that already pay tax through the quarterly instalment regime for very large companies.