How will corporate tax change under Making Tax Digital? – The new economy
The UK government unveiled an ambitious 10-year plan in July to reform the rest of the tax administration. Keen to capitalize on the success of Making Tax Digital (MTD) for VAT, he announced that he would open a consultation on what the design of MTD for corporation tax should look like, the reform of which should take place. be much more difficult and disruptive. than VAT.
Overdue for reform
Corporate tax processes have remained virtually 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 organizations with profits over £20m pay in instalments.
The main market expectation is that quarterly reporting will be introduced as part of the MTD for corporation tax. This could mean that we see up to six returns per year (four quarterly, one adjustment and one annual return), compared to the single return we have today. While quarterly filings are likely to be “lighter”, this means that we can expect a significant increase in the time spent on annual corporate tax filing than at present.
Some corporation tax calculations are very complex and probably won’t be easy to do several times a year. Take the Corporate Interest Restriction (CIR), introduced in 2017, which has multiple steps to calculate interest deduction, group ratios, debt limits and caps, and more. Other industries, where sales are seasonal, such as in the retail space, might find it problematic to apply specific calculations on a quarterly basis without this reporting bias.
Quarterly reports are also likely to increase workloads, which could change how large companies allocate resources. This will therefore have an impact on the resource models and could change the operating model of the tax function as a whole.
The role of technology
What about technology, surely MTD aims to digitize the returns process and reduce the workload? As part of BAT for VAT, the entire process from source to submission will be digitized by the end of 2021, when the use of digital links will be made mandatory. This in turn has driven the adoption of the technology across the industry, seeing Excel templates replaced by dedicated technology solutions.
It’s not yet clear if we can expect the same with corporation tax, but if digital linkages are needed, it would change the way many corporations prepare their returns. Even those who already use commercial software should consider eliminating manual calculations in their process.
Today, nearly 75% of the time required to complete the corporate tax return is devoted to the first step: gathering the source data. This takes an inordinate amount of time and, as it is done manually or semi-manually, errors can creep in. The automation of this process will therefore be vital if quarterly reporting is implemented. To help solve this problem, we can expect MTD for CT to focus on ETL (Extract, Transform, Load) capabilities that can quickly extract data from one data source to another.
Projections versus reality
Corporate tax currently sees the company attempting to estimate its tax liability in order to determine the amount of corporate tax that should be paid. This method is far from ideal, as we have seen during the COVID-19 crisis, where projections have not matched reality. The 2020 corporate tax refunds are expected to significantly reduce tax revenue as many companies will seek to recoup money paid out for loss periods. Quarterly reporting should help prevent such large-scale refunds in the future, especially if predictive analytics is built into the software required to submit the return.
BAT for corporate tax will therefore likely be a more difficult process to digitize, requiring technology that can automate more complex calculations and provide additional functionality, such as forecasting. It is likely to increase the tax burden, at least in the short term, and could even see the emergence of new business models. But ultimately, he promises to make the process more accurate and efficient, provided government consultation recognizes and seeks to address these obstacles.