What exactly is Making Tax Digital for Corporation Tax ?
Making Tax Digital for Corporation Tax is part of a governmental initiative that requires businesses store their financial data as well as process and submit their taxes digitally. It affects taxes: VAT (Value Added Tax), ITSA (Income Tax Self-Assessment) and Corporation Tax. MTD is an acronym for Making Tax Digital which you may come across quite often.
This is not an entirely new approach to keeping accounting records though. Over the past few years, businesses have had to meet new requirements with respect to how their transactions are recorded and how their taxes are produced and submitted. Many businesses already use accounting software to record their transactions and to submit their taxes.
Admittedly, it can be confusing and hard to understand for business owners exactly what their obligations will be under the new rules. However, the purpose of this governmental initiative is to streamline the process of managing and submitting tax returns, because not only that incorrectly filed taxes cost the government several billion pounds per year, but they cause businesses disruption, stress and possible fines, too.
HMRC has published some relevant information on Making Tax Digital for Corporation Tax.
In this blog I will focus on Making Tax Digital Corporation Tax (also known as MTD CT) and I will answer the burning questions: What businesses are affected by Making Tax Digital for Corporation Tax and what do you have to do to be compliant with these new rules ?
What businesses are affected by Making Tax Digital Corporation Tax ?
Making Tax Digital Corporation Tax will apply to all entities within the charge to corporation tax, with only a few minor exceptions. The plans will not affect businesses who are subject to income tax, such as sole traders, who will instead fall within the MTD ITSA regime.
Unlike MTD for Income Tax Self-Assessment (and MTD for VAT to date) at the moment there is no exemption proposed for smaller businesses. 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 for companies in certain circumstances, the details of which are still to be clarified by HMRC at a later date. From what is understood to date, those companies that fall in the quarterly instalment payments regime for very large companies (i.e. with profits greater than £20 million) 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 do businesses need to do to be MTD CT compliant ?
It will no longer allowed to simply log in to the historic HMRC portal and manually type in and submit the Corporation Tax return figures. From the date that MTD CT will become mandatory, businesses will have to use MTD compatible software to:
- keep records of their sales, purchases, other income and expenditures digitally
- submit to HMRC a quarterly summary of income and expenses using HMRC approved MTD software; as plans for MTD for Corporation Tax stand at the moment, it seems that it will be up to the company to decide whether their quarterly updates include any accounting or tax adjustments, or they are just summaries of the income and expense transaction figures for the quarter. This will be confirmed by HMRC at a later date. For companies with 12-month accounting periods, the quarterly reports will need to be made one month after the end of the quarter.
- submit to HMRC an end of year report using HMRC approved MTD software; this does not have to be the same piece of software used to keep digital records (i.e. digital records may be kept using Quickbooks accounting software, while corporation tax may be submitted to HMRC using Taxfiler, for example). In any case, the two pieces of software have to be integrated with each other, in other words you cannot copy paste numbers from one software into the other.
The software they will have to use will be either a compatible software package or a bridging software to file the UK Corporation Tax Return via an API link (a link that bridges the accounting software with the HMRC portal). API is short for Application Programming Interface.
When does Making Tax Digital for Corporation Tax start ?
Though MTD for VAT and MTD ITSA have dates for their roll out that are known, with MTD for VAT in fact having already rolled out, HMRC announced that MTD for Corporation Tax will not be mandated before April 2026. Since it is 4 years away, it gives businesses a bit of time to prepare.
At the moment, the government is in the consultation phase about the structure that MTD CT will have. They published a consultation on the future design of Making Tax Digital for Corporation Tax. If you are a business that is required to file Corporation Tax, or an agent, or representative of a professional body or a software developer, then you are welcome to present to the government your views on Making Tax Digital for Corporation Tax.
Are paper records still allowed ?
You can still keep paper records such as spreadsheets or paper receipts, but from the starting date when MTD for Corporation Tax becomes mandatory, you are required to also keep these records in digital form using accounting software. Though so far you may have found it useful to keep your records on a spreadsheet, you may still do so if you find it helps you better organise your records, but you must have accounting software in place into which you can upload the spreadsheet. This will ensure your records are MTD compliant.
In order to comply with keeping records digitally, businesses affected by MTD for Corporation Tax will have to keep digital records of all transactions they undertake, and for each transaction they will have to record the date, the amount and the category. Businesses may also have to keep records of non-financial data such as company type, industry classification, addresses of properties and a group structure, and clearly identified entities in charge to the corporation tax. The exact requirement to keep this type of non-financial records digitally will be confirmed at a later date.
Will Corporation Tax have to be submitted at the same time as Statutory Accounts ?
At the moment, the government is considering plans to align the corporation tax return filing deadline with that for the statutory accounts. In practice, this would mean that private companies would only have nine months to file their corporation tax return (with six months for a public company). While at the moment there are no plans to change legislation to require all companies to file their company tax returns with HMRC at the same time as they file their statutory accounts with Companies House, the introduction of MTD CT could bring an opportunity to review and simplify existing processes.
Accountants must ensure that suitable software is in place before they sign a client up for the MTD service. Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
by Laura Sterian
LAS Accounting Ltd