New digital tax reporting rules for companies should be better targeted
The Chartered Institute of Taxation (CIOT) is concerned that the Government’s proposal for companies to keep digital records and provide regular updates to HMRC through software may fail to meet its policy objectives – and is likely to prove very costly for businesses to implement.
Making Tax Digital for Corporation Tax (MTD for CT) is part of HMRC’s plan to reduce the tax gap caused by taxpayer mistakes. It will require companies to keep digital records (to ensure more timely and accurate record keeping) and provide regular electronic (quarterly and year end) updates to HMRC directly from a business’ digital records, to prove that records are being kept digitally.1 HMRC expect MTD to reduce errors, but while most mistakes are understood to occur within small businesses, the Government has proposed that MTD for CT will apply to all companies liable to pay corporation tax, except for a small proportion, which will be exempted.
The potential costs and burdens on businesses from MTD for CT has led the CIOT to call for a rethink. In a recent submission to HMRC2 the CIOT calls on the Government to:
- Waive the quarterly reporting requirement for corporation tax where the company is in MTD for VAT.
- Exempt more businesses either from MTD for CT altogether or at least from the obligation to submit quarterly reports to HMRC.
- Ensure that the rules are not overly prescriptive, in order to prevent high compliance costs for no meaningful benefit.
- Implement MTD for CT in stages, focusing on simple businesses and basic requirements first.
- Simplify the corporation tax system before MTD for CT is introduced.
- Adopt a ‘soft landing’ phase for the introduction of digital links as there was for MTD for VAT.3
CIOT spokesperson Tina Riches said:
“Quarterly reporting for corporation tax should be waived where the company is already quarterly (or more frequently) reporting under MTD for VAT, as this already achieves the policy aim of more timely digital record keeping and submitting periodic data to HMRC.
“The proposal for quarterly reporting for corporation tax is likely to prove very costly and administratively burdensome for many companies to comply with, particularly large and medium-sized companies and groups, with no obvious benefits to either them or HMRC. Most of these businesses are highly likely to have been using software and keeping digital records for many years already.
“Digitalisation can give rise to benefits, but these must be compared to the costs of introducing new digital requirements just for corporation tax before new additional administrative burdens are placed on business. The complexity of large companies and groups means that MTD as currently proposed will add significant burdens for this population and will be very expensive for them to implement; yet will not fulfil the HMRC’s objective of improving compliance generally and removing errors, most of which appear in small businesses.
“It does not make sense to impose a ‘one size fits all’ solution on all businesses liable to pay corporation tax. We strongly suggest that more businesses are exempted either from MTD for Corporation Tax altogether, deferred until a later date as happened with VAT, or exempted at least from the obligation to submit quarterly reports to HMRC.”
The CIOT welcomes the decision not to mandate MTD for CT before April 2026 but appeals for HMRC to implement it in stages and to create a detailed road map so that businesses can better understand HMRC’s proposals, including timings. This will help businesses plan software changes, together with appropriate procedures and processes and help avoid the risk of an unsuccessful roll-out. The Institute suggests a road map should include a comprehensive plan of how MTD for CT will work for all sizes and complexity of mandated businesses, to ensure that systems will be able to cope.
Tina Riches said:
“While promising that ‘Accountants and agents will be able to provide a full service to their clients through MTD for CT’, there is a remarkable lack of explanation in HMRC’s consultation document about how this will happen. 85 per cent of businesses liable to pay corporation tax rely on agents. The HMRC Charter4 promises that the tax authority will ‘recognise that someone can represent you’. But the consultation document fails to show how this promise will be delivered under the government’s proposals. This area needs a thorough review."
1. HMRC’s Consultation Document Making Tax Digital: Corporation Tax is here. At para 1.19 HMRC state that ‘the amount of tax lost annually through avoidable error stands at £8.5bn; HMRC estimates that around £2.1bn of this relates to CT alone’.
2. Making Tax Digital: Corporation Tax. Response by the Chartered Institute of Taxation is here.
3. There should be a ‘soft landing’ phase for the introduction of digital links as there was for MTD for VAT, says the CIOT. This is likely to be a key area of complexity for all but the smallest companies. The CIOT believes that HMRC should be clearer about the proposal to digitally link software from the transaction level data, through various other software, potentially including statutory accounts software, corporation software and tagging software) to the submission of the tax return; and the acceptability of bridging software to allow this.
4. HMRC’s Charter, which explains what taxpayers can expect from HMRC and what HMRC expect from taxpayers is here.
5. Corporation Tax is payable on the taxable profits of a company. This includes money the company makes from its business (trading profits), investments, chargeable gains and any rental income from property. For tax purposes a ’company’ means anybody corporate or unincorporated association, such as a club or co-operative for example a community group or sports club.