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How will corporation tax change under Making Tax Digital?

As part of ‘Making Tax Digital’, an initiative to make tax administration more effective, the UK government is opening a consultation for the design of a digital platform for filing corporation tax

The UK government unveiled an ambitious 10 year plan to reform the rest of the tax administration back in July. Keen to capitalise upon the success of Making Tax Digital (MTD) for VAT, it announced it would be opening a consultation on what the design for MTD for corporation tax should look like, the reform of which is likely to prove far more difficult and disruptive than VAT.

Overdue for reform
Corporation tax processes have been largely unchanged for over a decade. An established process; it requires software to calculate and file the return online on an annual basis, although very large organisations with profits in excess of £20m pay by instalments.

The main expectation of the market is that quarterly reporting will be introduced under MTD for corporation tax. This could mean we see as many as six returns a year (four quarterly, a true-up and an annual return), compared to the single return we have today. Whilst the quarterly returns are likely to be more ‘light touch,’ this means we can expect a material increase in the time spent on corporation tax reporting annually than at present.

Some calculations carried out under corporation tax are very complex and are unlikely to be easy to perform multiple times a year. Take Corporate Interest Restriction (CIR), brought in in 2017, which features multiple steps to calculate the interest allowance, group ratios, limits and debt caps etc. Other sectors, where sales are seasonal, such as in the retail space, could find it problematic to apply specific calculations on a quarterly basis without this skewing reporting.

Quarterly reporting is also likely to increase workloads and this could change how large corporations allocate resource. This will therefore have an impact on resource models and may change the operating model of the tax function overall.

The role of technology
What about technology, surely MTD is all about digitalising the returns process and reducing the workload? Under MTD for VAT, the entire process from source to submission will be digitalised by the end of 2021, when the use of digital links has been mandated. This in turn has driven the adoption of technology across the sector, seeing Excel models replaced with dedicated technology solutions.

It is not yet clear if we can expect the same with corporation tax, but if digital links are required this would change the way many corporations prepare their report. Even those already using commercial software would have to look at eliminating manual calculations within their process.

Today as much of 75% of the time taken to carry out corporation tax reporting is spent on the first step: gathering together the source data. This takes up an inordinate amount of time and, as it is done manually or semi-manually, can see errors creep in. Automating this process is therefore going to be vital if quarterly reporting is introduced. To help address this problem we can expect to see MTD for CT focus on ETL (extract, transform, load) capabilities which can quickly pull data from one data source into another.

Projections versus reality
Corporation tax currently sees the business attempt to estimate its tax liability in order to determine the amount of corporation tax that should be paid. This method is far from ideal, as we’ve seen under the COVID-19 crisis, where projections have not matched reality. It’s expected that corporation tax repayments for 2020 will put a large dent in tax revenues as many businesses will seek to claim back money paid for loss making periods. Quarterly reporting should help prevent such large-scale repayments in the future particularly if predictive analytics are incorporated into the software required to submit the return.

MTD for corporation tax is therefore likely to be a more difficult process to digitalise, requiring technology that can automate more complex calculations and provide additional functionality, such as forecasting. It’s liable to increase tax workloads, at least in the short term, and could even see new business models emerge. But ultimately it does promise to make the process more accurate and efficient, provided that is the government’s consultation acknowledges and seeks to resolve these hurdles.