Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 12 November 2020. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.

We would be happy to discuss any aspect of this submission and participate in any further consultations/initiatives in this area as this project develops in the coming months and years.

It should be noted that the comments in this submission are made in the context of the short timescale to respond to this consultation which was not afforded a longer period for responses similar to other consultations launched during the still ongoing COVID-19 pandemic such as the 2020 consultation Call for evidence: raising standards in the tax advice market.

Since this consultation was launched, Chartered Accountants Ireland has taken every opportunity to raise awareness of this important consultation amongst our members by publicising the consultation itself, its related sector specific events and the online survey in addition to directly seeking the feedback of our members.

However, as set out in our email to Roy Wallace (Interim MTD Director) of 16 February 2021, the ability of our members to provide feedback has been hampered by the pandemic which has resulted in an extremely heavy workload in addition to the usual self-assessment (“SA”) busy season.

Our members in practice and business continued to be under extreme pressure last month when often this would have been a quieter time in previous years – work continued by them in supporting their clients on COVID-19 grants and supports including making job retention scheme claims which now have monthly deadlines.

They and many taxpayers in business also continued to work towards filing 2019/20 SA returns by the end of last month to avail of the suspension of the £100 late filing penalty if filed by 28 February 2021. This created a further bottleneck for our members which meant we have not been able to gather the feedback we needed to make a more detailed response to this consultation.

The comments made herein are therefore made in the context of the limited timescales available to our members to fully consider the consultation proposals. We note however that this is just the first step in the Making Tax Digital (“MTD”) for corporation tax (“CT”) project and we will continue to engage with you as these proposals develop.

The case for introducing MTD for CT

As set out in our July 2020 position paper The Next Financial Year1, which was published before the UK Government’s July 2020 corporate report Building a trusted, modern tax administration system2, Chartered Accountants Ireland is supportive of accelerating the digitisation of business and the economy in general and therefore of further digitisation of the UK tax system. However, we remain to be convinced that there is currently a clear case for the introduction of MTD for CT, albeit that this is not proposed to be mandated before April 2026.

In December 2017, HM Treasury published The new Budget timetable and the tax policy making process3 which reaffirmed the UK government’s commitment to the principles set out in Tax policy making: a new approach4, published in 2010. The 2010 principles set out clearly that when embarking on significant areas of reform, such as the current consultation, the Government will begin by setting out its policy objectives including the case for change.

Whilst the current consultation considers how the principles established for MTD could be implemented for entities within the charge to CT and also examines the potential design of the regime, it makes no reference to the Government’s specific policy objectives for introducing MTD for CT, except to set the current consultation within the context of the Government’s 10 year tax administration strategy and its overall strategy of reducing the level of tax lost annually through avoidable error.

Although the consultation cites the level of avoidable error made by business as being £8.5 billion, HMRC is only able to estimate in the current consultation that £2.1 billion of this relates to CT. However no further evidence has been provided to establish how this figure has been arrived at nor to further break this down into taxpayer groups or behavioural categories. In addition, the overall CT gap according to the most recently published statistics is £4.4 billion5. This therefore suggests that avoidable error comprises almost 48 per cent of the total CT gap.

Previously HMRC has cited a reduction in avoidable errors as also being a key driver in introducing MTD for VAT which commenced in April 2019. On that basis, we should therefore expect to see a reduction in the VAT gap from its 2018/19 level of £10 billion6 when the 2019/20 statistics are published later this year. Until those statistics are published, it is therefore difficult to assess if MTD is working as intended to reduce avoidable error. In addition, HMRC’s Making Tax Digital: An evaluation of the VAT service and update on the Income Tax Service7 notably commented in March 2020 that even after the first year it was too early to evaluate the impact MTD will have on the Tax Gap.

It appears therefore that at present the Government has settled on the policy of introducing MTD for CT having previously not consulted, or invited any comment, on if it should be introduced and the case for doing so, if any. We feel it is important to explore this aspect further before considering the proposed design and implementation of the regime in detail and would therefore welcome a discussion on this.

Tax complexity

Since the MTD Roadmap was first launched in December 2015 it is clear that the continuing complexity of the UK tax system is impacting on its ability to go fully digital. In the last few years, this Committee has been directly engaging on tax complexity with the Office of Tax Simplification (“OTS”). In November 2019, the Committee published four position papers on tax complexity and continues to hold the view that unless tax complexity is addressed, effective and efficient further digitisation of the UK tax system cannot be achieved successfully.

CT legislation in the UK is no less complex than other taxes and, like many other taxes, complexity continues to increase on an annual basis. In recent years, some examples of additional complexity include the annual tax on enveloped dwellings regime, corporate loss reform including the introduction of the loss deduction allowance, the corporate interest restriction, the non-resident capital gains tax regime and the moving of non-resident company landlords into the CT regime to name but a few areas. This week’s Budget announcement will see the operation of two corporation tax rates by 2023 and this will add further complexity to the corporation tax system.

Many UK companies are also required to satisfy various pieces of UK tax transparency and accountability measures which sit outside the annual CT return preparation process such as the senior accounting officer legislation, country by country reporting and publication of large businesses tax strategy.

MTD for CT will therefore be extremely difficult to achieve without a defined roadmap over the next five years to reduce CT complexity before mandation of MTD for CT begins at its earliest point of April 2026.

Although the OTS published an update in July 20208 on its CT reports and its work on small company taxation which discusses a simpler CT computation for the smallest companies to more closely align the profits per accounts to profits for CT purposes, this work has not yet to be taken forward. This should be done as a matter of urgency alongside a defined roadmap for reducing CT complexity overall.

Given the current level of complexity, it is therefore difficult to envisage the benefits, if any, which would accrue to companies and HMRC from the preparation and submission of quarterly information. This is particularly striking in the context of group scenarios where the final tax position in respect of each group company cannot be determined until all group accounts have been audited and signed off and the group’s overall tax position including the sharing of group relief and CT instalment payments (where there is a group payment arrangement) has been determined.

In addition, even the smallest of stand-alone companies often finds its final CT position may differ to that provided for in its financial statements due to items such as decisions made on the best use of claims for loss relief, the final capital allowances claim and claims for R&D tax relief etc. which may not be finalised until after the company’s financial statements are filed with Companies Registry.

Modified design for very large businesses

The consultation proposes a modified design of MTD for CT for very large businesses which have augmented profits at an annual rate in excess of £20 million and are required to pay their CT through the quarterly instalment payments regime. This modified design would mean that such companies would not need to provide quarterly updates to meet MTD obligations on the basis that such companies are already interacting with HMRC via their quarterly CT instalment payments.

This, therefore, would provide certain companies with an exemption however it ignores other companies also within the CT quarterly instalment payments regime who are not classed as very large (profits in excess of the £1.5 million but below £20 million). The only difference between these companies is that the final payment of CT for companies which are not very large for a 12 month period takes place on the 14^th day of the fourth month after the end of the relevant accounting period instead of the 14^th day of the final month of the accounting period for very large companies. The calculation of their CT instalment payments and recording keeping requirements etc. are identical to those of very large companies.

If HMRC is concerned that companies paying CT instalments which are not classed as very large are not providing sufficient tax assurance to HMRC via their quarterly instalment payment obligations, it would seem to us that HMRC would, in such cases, be making more widespread use of the penalty regime for CT instalment payments as provided for in Regulation 13 of the Corporation Tax (Instalment Payments) Regulations 1998. However, we are not aware that these penalty provisions are widely used in practice which suggests to us that HMRC is currently satisfied with the level of tax assurance provided by companies such paying CT in instalments, unless a Regulation 13 penalty has been charged. Therefore an exemption should be available from quarterly filing for all companies paying CT in instalments.

However, we do not believe that basing an exemption from quarterly MTD filing obligations should solely be limited to companies paying CT in instalments. This exemption should also be available to companies which are subject to statutory audit and where an unqualified audit opinion has been reached in the previous accounting period.

Currently, companies are only exempt from statutory audit if they meet two of the following three criteria:-

• an annual turnover of no more than £10.2 million;
• assets worth no more than £5.1 million;
• 50 or fewer employees on average.

The statutory audit is an annual independent assessment of the financial accounts of a company. The role of the auditor is to report on whether the financial statements provide a ‘true and fair’ view including meeting all relevant guidelines and legal requirements. As part of the statutory audit, the auditor also audits the tax disclosure and tax provision in the company accounts which also includes a tax reconciliation or “proof of tax” which must be completed in accordance with UK GAAP.

Conclusion

We look forward to engaging in further consultation in future on this matter. In the meantime, in the context of the foregoing, as a minimum we believe that the following key points merit serious consideration:-

1. The case for introducing MTD for CT needs to be set out by HMRC in detail which should include a review of the impact of MTD for VAT in 2019/20 and 20/21 on reducing the tax gap;
2. The OTS’s work which has commenced on CT complexity should be taken forward in tandem with a defined roadmap for addressing CT complexity over the next five years; and
3. The exemption from MTD for CT quarterly filing should be available to both companies paying CT in instalments and companies subject to statutory audit in the current accounting period which received an unqualified opinion in their previous accounting period.