Making Tax Digital (MTD) is at the heart of the government’s vision to transform tax administration. We’ve already got MTD for VAT and, following the recent consultation process, Making Tax Digital for Corporation Tax is on its way.
For the government, MTD for Corporation Tax (CT) is about reducing errors that lead to a £2.1 billion Corporation Tax gap.
The digital tax system is built upon three basic principles:
- Keeping certain records digitally, using MTD compatible software
- Online filing of quarterly income and expenditure updates with HMRC
- A finalisation process after the end of the accounting period.
The MTD for CT regime is likely to be tailored for companies at both ends of the spectrum. The largest companies (with profits over £20 million) will pay CT through the Quarterly Instalment Payments regime, whilst the smallest micro-businesses will have their own niche requirements.
What will change with MTD for CT?
Digital record keeping
The consultation states that: ‘digital records kept within the entity’s software may also form the prime record for their accounts. To comply with MTD, accounting and tax adjustments relating to the period will need to occur either in that software or alternatively in linked software’.
As a minimum, the date, amount and category of each transaction will need to be recorded digitally. This applies to both income and expenditure.
The income categories for smaller businesses are expected ‘to have some parity with’ categories for MTD for Income Tax. These are likely to include dividend payments, loans and other benefits provided to directors, participators and others, including director loan balances.
Some companies will need to move across to new MTD-compatible accounting systems. For others, it may be possible to use their existing software, including spreadsheets, and to connect to HMRC systems via bridging software. It’s likely that a range of software solutions will also be acceptable for MTD for CT.
Quarters will be aligned with the accounting period, with the deadline for updates falling one month from the end of the quarter.
Various tax and accounting adjustments convert the raw data into GAAP compliant accounts and indicate the company’s final tax position. At present, these adjustments would normally be carried out at the end of the accounting period. The current proposal for MTD for CT is that it will be possible to adjust quarterly figures to indicate such adjustments. However, this will not be mandatory.
The end of the end-of-year CT return?
MTD won’t spell the end of the annual CT return, CT600 process. Under the new system, the return will be submitted via MTD-compatible software. The current position – whereby claims to the usual allowances and reliefs are submitted at this point – is likely to remain.
It’s also worth noting that the government is reviewing the possibility of using MTD for CT as the opportunity to align filing dates for tax and company law purposes. This would see the company tax return filing date brought forward.
The government recently finished consulting on how MTD will best work for CT. It is firmly committed to MTD and its planned roll-out to other taxes so, whilst there may be changes to the small print, it’s unlikely that there is any going back.
You will be able to test the system for MTD for CT with a voluntary pilot from HMRC, expected from April 2024.
MTD for CT won’t be mandatory before April 2026.
How will digital Corporation Tax affect your business?
HMRC anticipates that the transition to MTD for CT will be most challenging for companies with turnover below the £85,000 VAT- registration threshold. If your business needs to adapt its processes, software or systems to enter MTD, it’s a good idea to start planning for this now. Your company may have different reporting requirements for MTD for CT and MTD for VAT. Do not assume that software that complies with one meets all the requirements of the other.
Advice for charities, clubs and not-for-profit organisations
MTD for CT is concerned with ‘entities within the charge to Corporation Tax’. The potential impact of the change is far-reaching, with implications for charities, community amateur sports clubs and other not-for-profit organisations.
When the question was first raised some years ago, the government suggested that the non-trading activities of charities would fall outside MTD, whilst charitable trading subsidiaries would fall within it. There has since been a shift and the current proposal is that all charities are within the scope of CT. As such, they are required to file a company tax return and should enter MTD for CT. We will provide further clarity as we receive more information from the government on this.