HMRC are asking for views on the potential design of the MTD system for organisations within the charge to corporation tax.
On 12 November 2020, HMRC published a consultation document to explore how the principles established for Making Tax Digital (MTD) and already widely in use for VAT could be implemented for corporation tax (CT). The process will require companies to maintain their records digitally and the submission of quarterly updates and a year-end tax return using MTD compatible software. For the very largest companies with annual profits over £20 million there will be no requirement to submit quarterly updates although the position for companies operating at the threshold is unclear. For the smallest companies, a further simplified consultation document has been promised in the coming months. The changes, if implemented, would have a significant impact on the tax compliance process for companies and it is therefore welcome that the consultation is open for almost four months, until 5 March 2021. The document also confirms that MTD for CT will not become mandatory before April 2026 with a proposed voluntary pilot from April 2024. This article provides some initial comments.
MTD for CT is described as a means of reducing the tax gap for entities liable for CT. The focus is primarily on those entities with turnovers at the lower end of the spectrum, where HMRC feel there is currently significant underpaid tax as a result of errors being made by reporting entities. HMRC estimate that around £2.1 billion of the tax gap relates to CT.
The process will be the submission of quarterly updates within one month of each quarter end and a largely unchanged year-end tax return. The indication is that the quarterly submissions will focus on accounting data (not necessarily GAAP compliant), with the option of including indicative changes in relation to tax treatment but this will not be a requirement. An annual tax return will be retained as the means of taking final decisions related to tax treatment.
There is a clear move to exclude the most complex businesses from the scope of quarterly updates, although they will still have a requirement for digital record keeping and to submit their year-end tax return using MTD compatible software. The exclusion will only apply to very large companies with profits at an annual rate in excess of £20 million that pay their CT via quarterly instalments payments (QIPS) during the accounting period. This is on the basis that these companies already provide enhanced levels of tax assurance to HMRC through the QIPS regime, interaction with their Customer Compliance Managers (CCM) and the Business Risk Review (BRR) process. However, there is no clear view yet on how this would apply to companies operating around the £20 million threshold and HMRC have asked for input on this.
Inbound entities will likely be required to file quarterly submissions, insofar as they are not part of the QIPS regime and this may prove challenging for UK branches of non-resident companies if accounting records are not maintained separately. Likewise, HMRC are looking to extend MTD for CT to charities and other not-for-profit organisations within the charge to CT and required to complete a Company Tax Return.
Groups may be able to operate their digital record keeping on a group basis and to nominate a reporting entity to manage obligations under quarterly updates and year-end tax returns although the document does not go into a great deal of detail on this aspect.
Notably, the document 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.” Our understanding is that this applies across the board, i.e. it will be necessary to link accounting data directly to the tax return submission for all sizes of business.
There is expected to be less tolerance to inaccuracy on iXBRL tagging. The consultation document states that “HMRC expects that following the introduction of MTD for CT, iXBRL tagging will be integrated into MTD compatible software and most concepts will be automatically tagged as part of an entity’s ongoing digital record keeping.”
There is also a general question around aligning tax return submission deadlines with accounts filing deadlines although it looks as though no decision has yet been made on this.
Given the significance of these proposals we highly recommend that all businesses within the scope of CT review the consultation document and consider submitting comments.
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