Every business owner knows that completing the company tax return takes time and money, whether they use their in-house finance team or ask their external accountant. So the idea of taking advantage of digital technology to modernise and standardise company tax returns would be a big win, but only if HMRC can make it work for taxpayers as well as themselves.
It is hard to imagine that any entrepreneur or business owner wants to spend a lot of time thinking about the tax returns they make to HMRC. But with a complex tax code and every business being different, it is not hard to imagine the complexities involved. And complexity equals cost.
To try and cut down the variables in a company tax return as much as possible, HMRC recently issued a consultation seeking views on the implementation of full prescription of the content, format and XBRL data tagging of computations submitted as part of the company tax return. In particular, the tax authority is keen to get views on implementation timelines, arrangements to ensure a smooth transition from the current rules, and proposals for proportionate enforcement mechanisms to secure compliance.
Since late 2024, HMRC has worked closely with key software developers, the advisory community, professional bodies and other relevant stakeholders to design and deliver the first phase of prescribed requirements for corporation tax computations.
Corporation tax computations are part of the company tax return, alongside the CT600 and the company accounts. The computations are currently submitted in a free-format structure and tagged in XBRL (eXtensible Business Reporting Language) to make them machine readable. As HMRC puts it, too much divergence has evolved over time in both presentation and the way XBRL tags are applied, resulting in significant variation in how essentially similar information is presented.
Closing the tax gap
The tax authority reckons the tax gap for corporation tax is 15.8% of the theoretical corporation tax liability, or £18.6 billion in absolute terms, in the tax year 2023 to 2024. A standardised, fully tagged format for corporation tax computations could promote efficiency by triggering fewer enquiries from the tax authorities and reducing repeated taxpayer input.
Against a challenging economic backdrop for UK businesses, it is important that new compliance obligations remain proportionate. Cumulative burden of regulation has the biggest impact on business. Parallel processes, overlapping obligations and duplicate requirements make compliance much more time intensive.
Standardisation can only go so far. HMRC needs to make sure the new system has flexibility. So-called locked tags in software products help to promote both consistency and standardisation, but HMRC needs to be clear how such requirements operate in real-world contexts, including the process that underpins alterations and the blocking of submissions.
Under this plan, HMRC is going to publish an approved corporation tax software product list. This would help in providing greater transparency for businesses and their advisers and would improve compliance outcomes. But an approved list does create risk: HMRC would be assuming wide-ranging technical responsibilities including approving individual products, security governance and continuous monitoring.
If there are approved providers, that means over time some software providers will be unapproved. The implications of such deletion need to be understood. Onboarding software is never simple. It requires time and investment, with substantial licensing costs often set in place for several years. So backing the wrong tax software could prove costly. HMRC needs to be clear to business when their software provider is no longer approved, and there needs to be an easy route to switch to an approved supplier, ensuring all essential data comes with them.
HMRC looks certain to press ahead with this big change on company returns as it looks to transform itself into a digital-first tax authority. It wants 90% of all interactions with taxpayers to be digital by 2030. Companies should assume this change is coming and work with their technology and tax advisers to ensure they are up to speed for when the switchover happens.
