MTD is coming to corporation tax

Making Tax Digital (MTD) has been with us for VAT purposes for over a year and a half and is due to be extended to income tax self-assessment from April 2023. But until very recently, it wasn’t clear when, or even if, corporation tax would be brought within the MTD fold.

That all changed with the publication in mid-November of a consultation which confirms that MTD will be coming to corporation tax, though not before 2026.

In this article we will take a quick look at what is being proposed, and what this might mean for companies and their agents in practice.

What will MTD look like?

The extension of MTD to corporation tax will mean a fundamental shake up of record keeping and filing requirements for companies. In summary, under MTD companies will need to:

• maintain digital records of their income and expenditure;
• provide quarterly updates of income and expenditure to HMRC using MTD compatible software; and
• file their annual CT return using MTD compatible software.

It is likely that these requirements will lead to most companies and their agents having to make changes to their current software and processes.

Digital records

Under MTD for corporation tax, companies will have to keep a digital record of all transactions they undertake. The proposal is that, for each transaction, the date and amount will have to be recorded and a category assigned.

The requirement to categorise each transaction means that even those businesses that currently keep digital records are likely to have to make some changes. It appears that there will be a specific list of categories to be used, with the consultation proposing a minimum of 28 different ones (including trading income, bank interest, rent and rates, car expenses etc).

In addition to this transactional data, the digital records will also need to include some non-financial data, such as company type, industry classification and addresses of properties.  There’s also a proposal that this could include a group structure, with entities in the charge to corporation tax clearly identified.

Quarterly updates

A brand new requirement under MTD will be to submit a quarterly update to HMRC using compatible software.

HMRC’s theory is that it should be possible to do this in a straightforward manner, by letting the software automatically prepare quarterly updates from the digital transaction records.

It will be up to the company whether these quarterly updates include any accounting or tax adjustments or are just summaries of the income and expense transaction figures for the quarter.

Whilst submission of unadjusted figures is likely to be simpler, making such adjustments may allow companies to get a clearer picture of what their eventual tax liability is likely to be.

The consultation proposes that update periods will be linked to the accounting period, with a filing deadline of one month after the end of the quarter.

Hopefully there will be some flexibility in this, as otherwise companies within MTD for VAT whose VAT quarters don’t align with their accounting period quarters could effectively have eight quarterly updates to file each year.

Final return

The final piece in the MTD puzzle is that companies will need to use MTD-compliant software to calculate and submit their normal end of year corporation tax return. This doesn’t have to be the same piece of software used to keep digital records, but where it isn’t ‘digital links’ will need to be put in place between the different bits of software used – it won’t be possible to manually type in or copy and paste totals from one programme to the other. This may prove to be problematic for some companies, such as groups using different pieces of software, or those with complex accounting systems or those using point of sale systems that are not MTD compliant.

One area explored in the consultation, which arguably goes beyond the remit of MTD, is whether there is scope to align the corporation tax return filing deadline with that for the statutory accounts.  This would mean that private companies would only have nine months to file their corporation tax return (six months for a listed company). Given that the accounts are the starting point for preparing the return, this is likely to create practical difficulties and require companies and agents to further change their compliance processes.

Exemptions and special cases

It is proposed that MTD will apply to all entities within the charge to corporation tax, with only a few minor exceptions.

Unlike MTD for income tax self-assessment (and MTD for VAT to date) there is no exemption proposed for smaller businesses. Instead, the only true exemptions proposed are for the digitally excluded (i.e. those for whom it’s not ‘reasonably practicable’ to use digital tools to keep records and file updates) and insolvent entities which would normally be exempt from online filing.

However, it is proposed that the requirements could be relaxed or flexed for companies in certain circumstances. In particular, those companies that fall in the quarterly instalment payments regime for very large companies (i.e. with profits in excess of £20m) may not be required to submit quarterly reports, though they will still be required to keep digital records in the required format and submit their annual return using MTD compatible software.

What next?

The consultation closes on March 5, 2021 and HMRC have indicated it will publish a simplified version of the consultation, aimed at small companies. The aim is then to launch a pilot of the service in 2024, followed by mandation from April 2026 at the earliest.