A new consultation has been published by HM Revenue & Customs (HMRC) which explores how the core principles of Making Tax Digital (MTD) can be applied to Corporation Tax (CT).
Within the new consultation document, HMRC has made it clear that MTD for CT is a means of tackling the underpayment of tax, especially among SMEs, where HMRC believes these are significant issues with errors. The tax authority has indicated that as much as £2.1 billion of the tax gap relates to CT.
Along similar lines to the existing MTD for VAT system, the proposals put forward a process that would require companies to maintain their records digitally and the submission of quarterly updates and a year-end tax return using MTD compatible software.
These quarterly submissions will focus on accounting data, with the option of including indicative changes to tax treatment. However, the usual annual tax return will be retained to allow HMRC to take a final decision on tax treatment.
The change will also affect business groups who may be allowed to operate their digital record-keeping on a group basis to manage obligations under quarterly updates and year-end tax returns.
This change would affect the majority of businesses, apart from the very largest and most complex companies with annual profits above £20 million, who will be exempt from making quarterly submissions. HMRC has indicated that other compliance procedures should ensure they pay the correct amount of tax without this measure.
Under the current proposals, it will be necessary to link accounting data directly to the tax return submission for all businesses.
The consultation states: “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.”
It also indicates that it expects far more to be done via MTD compatible software, rather than by currently accepted processes, such as iXBRL tagging.
If implemented the changes explored in the consultation document would have a significant effect on the tax compliance process for companies, which is why HMRC has confirmed that MTD for CT will not become mandatory before April 2026.
Instead, it plans to hold a voluntary pilot from April 2024 to test the effectiveness of the system, before rolling it out more widely.
Although the current consultation ends on 5 March 2021, the tax authority has promised a further simplified consultation document for smaller companies in the months to come.