Making Tax Digital was always going to be an ambitious undertaking. The simpler requirements of VAT made it an ideal candidate to test the waters, clearing the way for the digitalisation of more complex taxes, such as corporation tax and income tax. The question as to when can we expect MTD to extend to these other taxes and what compliance will entail has been a contentious subject, causing businesses to question whether they will need to invest again.
In his Spring Statement, Chancellor Philip Hammond stated that “the government will not be mandating MTD for any new taxes or businesses in 2020”. Therefore neither income tax, currently in limited pilot, nor corporation tax, still to progress to draft legislation and consultation stage, will be mandated before April 2021. Understandably, the current focus is on getting VAT right and “helping businesses to transition”.
Appetite for regime change
The Government has always been clear that it would “not widen the scope of MTD beyond VAT (MTDfV) before the system has been shown to work well”. Progress has already been made, with the success of the VAT pilot and the number of software suppliers offering MTDfV solutions. The system will really be tested in earnest when the April-June stagger (c.38%) submit their first mandatory MTD return in July/August this year.
Since MTD was first announced, in 2015, both the timing and the order of introduction have changed, but the commitment to the extension of MTD is still there, as confirmed in the House of Lords Economic Affairs Committee report (November 2018). The report went on to say businesses would “prefer to move to a system that would be compliant for all taxes”, suggesting businesses want to invest in a way that facilitates future compliance.
Whilst we do not know when MTD will extend, we know it will. The question that remains is how businesses can prepare for this future change.
Further digitalisation will not be easy. VAT and corporation tax come from very different starting points, especially when you consider the complexities of the corporation tax calculation. While MTDfV imposes changes affecting record keeping and submission, the reporting frequency is unchanged. This is not the case with MTD for corporation tax (MTDfCT) which will add to the reporting frequency, with the prospect of quarterly submissions challenging current business processes.
Yet reform is long overdue. Corporation tax compliance monopolises a huge amount of resource, with up to 75 percent of the time taken to complete returns spent on manual or semi-automated data collection. Embracing digitalisation and automating this process will drastically reduce this workload, freeing up tax professionals to focus on other value add areas.
Unlike VAT, most corporation tax returns are prepared and submitted using commercial software. With MTD mandating digital record keeping and the increased frequency of reporting, it is essential that the systems used for record keeping and those used for compliance are tightly integrated. Data may need to be aggregated from multiple native data sources and linked through to the compliance software, effectively eradicating manual processes such as ‘copy and paste’ and potentially rendering the spreadsheet obsolete.
Automated data extraction and integration will therefore be of fundamental importance and a prime consideration for businesses looking to lay the foundations for MTDfCT compliance. But organisations don’t need to start from scratch; the digital links implemented for MTDfV can be used to create this data pool.
What will an MTDfCT solution look like?
Ideally, businesses want any investment they make today to protect them against future regime change. So what might such a solution include?
- Digital record keeping: extended to meet the requirements of quarterly reporting
- Liabilities: an earlier view of tax liabilities using a projected corporation tax computation
- Digital links: drill back to source data in the accounting systems as statutory accounts (the normal starting point) would not be available
- Automation: machine reading techniques are already in use to apply basic income and expense analysis for the tax computation, and claims such as capital allowances and utilising losses could be applied automatically
If data is taken from financial systems into a central data pool, consolidated into common formats (while retaining full version history and providing digital audit trails), the business has the data readily available. An MTDfCT compliance engine can then easily use this data to aid completion of the MTD submissions.
Undoubtedly, there are still areas of MTD where we are dealing with unknowns. The intangible fixed assets regime, for example, is based upon following the accounting treatment, and the complexities of calculations such as the corporate interest restriction realistically could not be performed four further times per year. How the accruals principal is to be applied would also need consideration, for example in respect of retail businesses who experience seasonal sales and for whom quarterly reporting would give a misleading picture. But there are undoubtedly mechanisms that can be put in place for MTDfV which will lend themselves to MTDfCT as and when this comes online, as shown below.
Investing in a solution that can demonstrate compliance with the anticipated requirements of these more complex taxes will help businesses protect their MTD investment. At Tax Systems, our AlphaVAT family provides a pathway to MTDfCT. To find out more about what automated data extraction means, see our whitepaper on ‘The Evolution of Data Collection’. Or to see how to prepare for further regime change, see our ‘Digital as a Destination’ whitepaper.