Making Tax Digital for corporation tax is dead. Long live… ?

In summary

• MTD for corporation tax officially shelved, but HMRC remains committed to digital transformation, with a focus on tailored approaches for different business types
• AI and cloud technologies are reshaping tax administration, enabling HMRC to move away from one-size-fits-all models and toward smarter, risk-based interventions
• Businesses should expect increased reliance on third-party software, digital record-keeping and potentially in-year reporting, even without formal MTD for CT
• Now is the time for businesses to define their own digital tax strategy, leveraging automation and AI to streamline compliance and prepare for future changes

HMRC’s roadmap is a strong statement of intent over the digital direction of tax administration. It is clear on the benefits of MTD for VAT, both for businesses and for HMRC. It notes that “almost 70% of businesses had experienced at least one benefit from using MTD” and that in 2019-20, VAT accounted for 31% of the tax gap; by 2023-24 that figure had shrunk to 19%. 

It is clear on the benefits of electronic invoicing and committed to defining an electronic invoicing approach for the UK. There was also a strong commitment to the further roll-out of MTD for ITSA and alongside this, an unequivocal direction for corporate tax – but perhaps not the one expected:

Where then, does this leave the UK’s corporation tax in a digital world? There remains a commitment to “developing an approach to the future administration of CT that is suited to the varying needs of the diverse CT population”, and to consult early and widely on the design and timing of changes. 

While there is no defined successor to MTD for CT, the roadmap does provide a broad direction of travel and there is a strong commitment to digital reporting. It is almost inevitable that this will lead to changes in how the CT600 forms are structured and filed.

AI is undoubtedly front and centre of HMRC’s approach. While emphasis is placed on AI-led productivity tools to make HMRC more efficient, for example AI powered systems for caseworkers, the roadmap also comments on the role that agents and software providers will play. It notes that AI is increasingly able to make tax classifications within more general business accounting systems.

There is no specific reason given for the abandonment, but the repeated mentions of AI and third-parties hint that innovation comes from business rather than from government – and this is perhaps key to understanding the change of approach.  

When HMRC launched the consultation for MTD for CT in November 2020, the rise of Zoom was the hot tech story, the cloud was just becoming part of everyday conversation and ChatGPT was still two years away. The tech world has changed almost beyond recognition since then. The cloud makes it much easier to aggregate large amounts of data, and AI makes it much easier to interrogate it.    

Reflecting this back to the administration of CT, these changes also enable a move away from a one-size-fits-all approach. The roadmap acknowledges that the vast diversity in the CT base is a key reason for the adoption of a different approach. The cloud and AI make it possible for HMRC to make more targeted interventions through risk profiling, benchmarking, cross-matching and reconciliations.  

All of this means that the goals of MTD for CT can be achieved in different ways. But as well as the administrative efficiencies within HMRC, these goals include collecting better, more accurate and more timely information. Whatever the name of the program, these aims will not go away.

So in lieu of MTD, what can businesses expect? For starters, a stratified approach – the regime for charities, for example, is likely to look different to that for large corporates.  

Focusing on the more complex businesses, some elements are likely to remain. We can expect a push towards third-party software with integrated tagging – not a big stretch, as virtually all complex CT returns are completed on either Thomson Reuters Onesource or Tax Systems AlphaTax or cloud equivalents. It would not be a surprise to see some element of in-year reporting retained, and a requirement for maintaining digital records. It’s also plausible that there may still be a move to align tax return and Companies House filing deadlines.

All this remains speculation, however. While the announcement removes the uncertainty over MTD for CT timelines, it does not particularly help organisations that are looking for guidance in how best to automate their CT compliance processes.  

Many have already embarked on a digital evolution. For example, many businesses are automating the download and consolidation of source data. This extends to automated rules-based decision making (for example, based on keywords) or more sophisticated machine learning algorithms – where there is success in areas with high volumes of data such as fixed asset additions and legal and professional fees. The outputs of this can map directly into the tax return software.

The roadmap flags the role that AI is already beginning to play in this area. Commercial accounting software is beginning to include automated tax treatments and these will over time begin to meet the requirements of medium and large enterprises.

Whatever HMRC’s future direction, these approaches can only complement it and irrespective of the regulatory requirements, can generate huge savings in terms of time saved and optimising tax positions.

The fact that HMRC has published its roadmap is also a hint for businesses. Relatively few organisations have articulated their own strategy for how their finance and tax function will evolve, or a clear vision for how they see it working in the future. 

We have worked with businesses to set a vision and operating model for the finance and tax function. As well as providing an invaluable tool for managing the function itself, this can be a very useful way of getting wider organisational buy-in to a program of change.  

Soon, the new direction for digital CT compliance will become clear and participating in the consultation processes can help shape this. In the meantime, businesses can generate significant benefits through driving strategic automaton of the CT compliance process, as part of a wider strategic roadmap.

Please get in touch with your usual S&W contact or the contact listed if you’d like to know more.