Under its ten year tax administration strategy HMRC said it would consult with stakeholders on Making Tax Digital for corporation tax during autumn 2020, and is now seeking feedback to inform the early-stage design and get a better understanding of the transitional and ongoing costs and benefits for companies of different sizes.

Nearly three million businesses and other taxpayers are within the charge to corporation tax, of which around half incur a corporation tax liability every year.

If the principles and design proposed in this consultation are adopted, they would need to maintain their records of income and expenditure digitally; use Making Tax Digital compatible software to provide quarterly summary updates, and provide an annual corporation tax return using their Making Tax Digital compatible software.

The proposed date to commence a voluntary pilot for Making Tax Digital for corporation tax is April 2024, with mandation to follow from 2026 at the earliest.

Scope

According to the consultation, the scope of Making Tax Digital will include all companies resident in the UK, as well as the corporation tax activities of non-resident companies in the UK and other corporates that, under UK domestic legislation and tax treaties, are subject to a UK corporation tax charge.

The largest businesses, which already come under the wing of a specialist HMRC unit with enhanced levels of tax assurance, will be offered a modified design, if they have profits at an annual rate in excess of £20m and are required to pay their corporation tax through the quarterly instalment payments (QIPs) regime.

However, all businesses will be required to move to quarterly updates, which is a new reporting obligation for corporation tax purposes. The consultation considers how entities will provide regular updates to HMRC and how they could work for different segments, including what would be required and when, and how that might affect the making of accounting and tax adjustments (including claims to reliefs and allowances).

Most businesses will meet their future Making Tax Digital obligations on the existing basis on which a return is currently submitted, meaning individual entities will establish their corporation tax liability on an individual company basis.

This would mean that, in the case of a group entity where individual members of the group continue to report on an individual basis, the digital transfer of records held and maintained at group level would be needed to enable individual entities to provide quarterly updates and to prepare and submit their return through Making Tax Digital compatible software. Entities would be able to continue to make adjustments to calculate accounting and taxable profit as they do now.

The consultation also considers the implications for those group entities that choose to meet their Making Tax Digital obligations through a nominated entity and explores how digital record keeping and the provision of regular updates might operate.

For these taxpayers, the government also proposes aligning the process of establishing an entity’s final corporation tax liability. This would mean that the same nominated entity would be responsible for digital record keeping, quarterly updates and establishing final liabilities on behalf of other individual entities within their group or sub-group.

Filing dates

The consultation makes clear the government has considered whether Making Tax Digital for corporation tax provides the opportunity to align filing dates for tax and company law purposes by bringing forward the company tax return filing date.

Unlisted companies are generally required to submit accounts to Companies House within nine months of their financial year end unless they are a public limited company. Bringing forward the corporation tax filing date would mean that entities that are not listed would need to ensure that the tax computation was carried out to the same timeline as production of their accounts.

HMRC says it will work with Companies House and others across government to consider the best approach to filing alignment.

The Department for Business, Energy and Industrial Strategy (BEIS) will shortly be publishing a consultation containing proposals on ways to improve the value and quality of accounts information held at Companies House, including through harmonised filing standards and processes across government.

The government would also welcome specific responses on the alignment of the Company Tax Return filing date with other significant tax adjustments such as remuneration paid and the repayment of loans to participators.

Exemptions

The consultation also considers circumstances where entities should not fall within the scope of Making Tax Digital for corporation tax. This includes charities, community amateur sports clubs and other not for profit organisations.

Where an insolvent entity retains its responsibility to file an online company tax return, then Making Tax Digital for corporation tax obligations would continue to apply. However, where an insolvency practitioner has been appointed Making Tax Digital obligations would cease to apply at this point.

Costs

The consultation acknowledges that many entities, particularly smaller entities not subject to current quarterly filing requirements, will need to change processes to meet the new obligations and incur new costs as a result.

HMRC points out its latest tax gap analysis suggests the amount of tax lost annually through avoidable error stands at £8.5bn, of which around £2.1bn relates to corporation tax alone, and argues extending Making Tax Digital would help reduce opportunities for error, carelessness and deliberate non-compliance, while having the additional benefit of reducing the time that businesses spend on tax administration.

Tina Riches, chair of the joint Association of Taxation Technicians and CIOT digitalisation and agent services committee, welcomed the indication that Making Tax Digital for corporation tax will not be implemented before 2026, but highlighted a number of concerns.

Riches said: ‘We are disappointed that the consultation presupposes that most entities within the charge to corporation tax should be within the scope of Making Tax Digital, before the costs and benefit arising to different parts of the population have been established.

‘ATT and CIOT believe it is questionable whether there will be any positive difference for companies, especially larger ones.

‘If a key purpose of Making Tax Digital is to encourage taxpayers to become digital then it is not necessary to extend it to corporation tax, as a large proportion of companies are VAT registered and so already in Making Tax Digital for VAT, or using digital records anyway.

‘It is difficult to envisage how the complex nature of the accounting and corporation tax rules, especially when applied on a group or international basis, will interact with Making Tax Digital. There is a real risk that implementing Making Tax Digital for corporation tax could result in an expensive quarterly reporting exercise for companies, with no net benefits for any of the parties involved.’

Chris Sanger, EY’s head of tax policy, said: ‘It is good to see the government taking forward its digital plans but we are concerned that, against a background of Covid-19 and Brexit, this consultation may struggle to find engagement with stakeholders who will make direct use of the new system. 

‘There are many elements to this move and the consultation also included the idea of bringing forward the deadline for the filing of tax returns.’

In its ten-year tax administration strategy, the government has already confirmed, that Making Tax Digital will be extended to the remaining VAT population from April 2022 (businesses with turnover below the £85,000 VAT threshold) for their first VAT return period starting on or after 1 April 2022.

Making Tax Digital for income tax will come in for unincorporated businesses and landlords with £10,000 or more total business and property income who file self assessment returns, for periods of account starting on or after 6 April 2023.

The consultation on the extension to corporation tax will run for 16 weeks from 12 November 2020 to 5 March 2021.

Further reading:

Making Tax Digital corporation tax

Accountancy Daily roundup: Treasury releases tax policy announcements