Modernising Company Tax Returns: Balancing Efficiency and Practicality
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. The idea of harnessing digital technology to modernise and standardise company tax returns promises significant benefits. However, this will only be a true win if HMRC’s new approach works equally well for taxpayers as it does for the tax authority itself.
It is hard to imagine any entrepreneur or business owner eagerly dedicating hours to preparing tax returns for HMRC. The UK’s tax code is notoriously complex, and with every business having unique circumstances, the intricacies involved in filing accurate returns are considerable. Naturally, complexity translates directly into increased costs—both in time and money.
In an effort to reduce these complexities, HMRC recently launched a consultation seeking feedback on the full prescription of content, format, and XBRL data tagging requirements for the computations submitted as part of the company tax return. The tax authority is particularly interested in views on realistic implementation timelines, strategies to ensure a smooth transition from current practices, and proposals for proportionate enforcement mechanisms designed to secure compliance without overburdening businesses.
Since late 2024, HMRC has collaborated closely with software developers, tax advisers, professional bodies, and other stakeholders to design and implement the first phase of these prescribed requirements for corporation tax computations. This collaborative approach aims to ensure that the new system is both practical and effective.
Corporation tax computations form an integral part of the company tax return, alongside the CT600 form and company accounts. Currently, these computations are submitted in a free-format structure but tagged in XBRL (eXtensible Business Reporting Language) to make the data machine readable. However, HMRC notes that significant divergence has developed over time in both the presentation of computations and the application of XBRL tags, leading to considerable variation in how similar information is reported. This inconsistency hampers efficiency and complicates processing.
Closing the Tax Gap
HMRC estimates the tax gap for corporation tax—the difference between the amount of tax theoretically owed and the amount actually collected—at 15.8% for the 2023 to 2024 tax year, equating to approximately £18.6 billion. Instituting a standardised, fully tagged format for corporation tax computations could improve efficiency by reducing the number of enquiries from HMRC and minimising duplicate or repetitive taxpayer input.
Given the challenging economic environment facing many UK businesses, it is crucial that any new compliance obligations remain proportionate. The cumulative burden of regulation is often what most affects businesses, with overlapping requirements and parallel processes making compliance increasingly time-consuming and costly.
While standardisation offers clear benefits, it cannot entirely eliminate the need for flexibility. HMRC must ensure that the new system allows for practical adaptability. For example, “locked tags” in software products can promote consistency and adherence to standards, but HMRC needs to clarify how these will function in real-world scenarios, especially regarding processes for adjustments and the handling of submission blocks.
As part of this initiative, HMRC plans to publish an approved list of corporation tax software products. This transparency will aid businesses and their advisers in selecting compliant software, ultimately improving compliance outcomes. However, maintaining an approved list places significant responsibilities on HMRC, including technical approval, security governance, and ongoing monitoring of software products.
One potential risk of this approach is the eventual removal of certain software providers from the approved list. Transitioning between software platforms can be complex, involving time, investment, and often multi-year licensing commitments. Therefore, it is essential that HMRC clearly communicates when a provider loses approval and facilitates easy switching to approved alternatives, ensuring that all critical data is transferred seamlessly.
HMRC’s push toward this major transformation aligns with its broader goal of becoming a digital-first tax authority, aiming for 90% of taxpayer interactions to be digital by 2030. Businesses should anticipate this change and proactively engage with their technology and tax advisers to prepare for the transition.
For further detailed insights on HMRC’s plans and their implications for businesses, please visit Here.
