The government confirmed in November 2020 that Making Tax Digital (MTD) will be extended to apply to corporation tax. It was announced that MTD for corporation tax will come into practice in 2024 and will be enforceable from 2026. Making Tax Digital (MTD) makes it mandatory for businesses to keep digital accounting records and complete their VAT submissions to HMRC via an Application Programme Interface (API), utilising MTD compliant software. The roll out of MTD Phase 2 was postponed until April 2021 to allow businesses the breathing space to concentrate their limited resources and cash flow on surviving the restrictions imposed on trading due to the pandemic. 

MTD for Corporation Tax

All existing Prestige Business Management clients are already set up for MTD for corporation tax. Our processes are MTD ready for corporation tax in partnership with Quickbooks and other cloud accounting software, suitable to our clients needs. For businesses not yet prepared, the extension of MTD to corporation tax will cause an overhaul of business’s record keeping and filing requirements. It will become mandatory for businesses to adopt these procedures by April 2026. Businesses will need to invest in new MTD compliant software and to update accounting processes and the practices of accounting partners. 

MTD for corporation tax will require companies to:

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

Digital Record Keeping

Under MTD for corporation tax, businesses will need to keep a digital record of all transactions they undertake. It has been proposed that each transaction will need to be assigned a category as well as a digital record of the transaction, date and amount. This additional categorising means that even businesses currently using or phasing in their MTD practices, will still have further adaptations to make to comply with this by 2026. It is expected that a standardised list of categories will be issued by HMRC. These could be trading income, bank interest, rent and rates, car expenses amongst others. 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 is a further proposal that under MTD for corporation tax, businesses will be required to include a group structure within their categorised entries, whereby all the entities will need to be clearly defined. 

Quarterly Updates

A brand new requirement under MTD for corporation tax, will be to submit a quarterly update to HMRC using MTD compatible software. In theory this can be automated using the right software. Businesses will have to choose whether these quarterly updates will include any accounting or tax adjustments, or only a simple summary of the income and expenditure for each quarter. Whilst  regular submission of unadjusted figures. Unadjusted figures make for a simpler process, however making adjustments provides businesses with a clearer picture of what their eventual, annual tax liability is likely to be and to be better prepared for that in their cash flow. The MTD for corporation tax consultation proposed update periods be linked to the accounting period, with a filing deadline of one month after the end of the quarter. Issues will occur with MTD for corporation tax for businesses who use VAT quarters which don’t align with their accounting period quarters, whereby they could find themselves effectively having eight quarterly updates to file each year!

The Final Link

The final part of MTD for corporation tax is that businesses will need to use MTD compliant software to calculate and submit their usual 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 differs, ‘digital links’ will need to be put in place between the different software used, it will not be possible to manually type 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 programmes, or those with complex accounting systems, and any businesses using point of sale systems that are not MTD compliant. Prestige Business Management can recommend simple, MTD compliant technologies to help you prepare for these changes.

Exemptions 

Where MTD for corporation tax differs from MTD for income tax self-assessment and MTD for VAT, is that there is no exemption for small businesses. Instead, the only true exemptions in the proposal 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, businesses that fall in the quarterly instalment payments regime for very large companies, e.g. with profits of over £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.

Next Steps

The public consultation regarding MTD for corporation tax closed on March 5, 2021 and HMRC are presently analysing the feedback from businesses. They have previously indicated that they will publish a simplified version of the consultation, aimed at small businesses. Following this, the aim is to launch a pilot of the service in 2024, followed by a mandate from April 2026.

Prestige Business Management Works for You 

Prestige Business Management can help you prepare for MTD for corporation tax. We will publish updates as they are released. For more information call us today on 0203 773 2927.