In an era of digital transformation, the UK government has introduced the Making Tax Digital (MTD) scheme to streamline tax processes for businesses. While MTD has been in place for VAT since 2019, expansion has long been planned to include corporation tax. This blog post aims to provide small businesses with a comprehensive understanding of the MTD scheme for corporation tax, its benefits, requirements, and how to ensure compliance.

Understanding Making Tax Digital

Making Tax Digital is an initiative by HM Revenue and Customs (HMRC) to digitize tax administration, making it more efficient, accurate, and easier for businesses to manage their tax obligations. The scheme aims to replace manual record-keeping and paper-based tax returns with digital records and online submissions.

Benefits for Small Businesses

  1. Enhanced Accuracy: Digital records reduce the risk of human error, ensuring accurate tax calculations and submissions.
  2. Time and Cost Savings: Automating tax processes saves valuable time and reduces the costs associated with manual record-keeping and tax return preparation.
  3. Real-time Visibility: Digital records provide businesses with up-to-date financial information, enabling better decision-making and financial planning.
  4. Improved Compliance: MTD reduces the likelihood of errors and omissions, minimising the risk of penalties and investigations.

MTD for Corporation Tax: Key Points

1. Mandatory Compliance

MTD for corporation tax was originally planned to be launched in April this year. However it has now been pushed back until April 2026 at the earliest. It will then, potentially, be mandatory for all companies subject to corporation tax, unless there are further delays. Small businesses have several years to adapt their tax processes to meet the digital requirements set by HMRC. 

2. Digital Record-Keeping

Under MTD, businesses must maintain digital records of their financial transactions, including income, expenses, and other relevant data. Manual record-keeping using spreadsheets or paper-based systems will no longer be sufficient. Instead, businesses will need to use compatible accounting software to keep their records digitally.

3. Digital Links

To ensure seamless data transfer and accuracy, there should be digital links between different software systems used for record-keeping. Data should flow digitally from one software to another without manual intervention. For example, if a business uses separate software for invoicing and accounting, there should be a digital link between the two systems to transfer data automatically.

mtd for corporation tax digital links quarterly report

4. Quarterly Reporting

Under MTD for corporation tax, businesses will be required to submit quarterly updates to HMRC. These updates will include summary information about the business’s income, expenses, and profits. However, it is important to note that the actual payment of corporation tax will still be made annually.

5. Exemptions and Exclusions

Some small businesses may be exempt from MTD for corporation tax if they meet certain criteria. For example, businesses with religious objections, insolvency cases, or those with limited internet access may be eligible for exemptions. Additionally, businesses with annual turnover below the VAT threshold (£85,000) are currently excluded from MTD, but this may change in the future.

6. Preparation and Software Compatibility

To comply with MTD for corporation tax, small businesses need to ensure that their accounting software is compatible with HMRC’s systems. It is crucial to check with software providers or consult with an accountant to ensure that the chosen software meets the MTD requirements.

7. Penalties for Non-Compliance

Failure to comply with MTD for corporation tax can result in penalties and fines imposed by HMRC. Small businesses need to understand the requirements and deadlines to avoid any potential penalties.

As the UK government expands the Making Tax Digital scheme to include corporation tax, small businesses must familiarise themselves with the key points to ensure compliance. By embracing digital record-keeping, establishing digital links, and understanding the reporting requirements, small businesses can streamline their tax processes and benefit from the enhanced accuracy, time savings, and improved compliance that MTD offers.

An accountant can ease the stress around tax return time and help you save money on your tax bill. Get in touch with Neil Smith Accountancy, chartered accountants in Maldon and Witham, Essex. Having served small businesses and sole traders in and around Essex and London for over a decade, they have the experience and skills to help your small business.

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