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  • Gary Smith
  • November 28, 2022

VAT late filing penalties and other MTD non compliance being introduced

Under the MTD (Making Tax Digital) rules, using the wrong software for VAT returns could land you with a fine. There are also potential penalties for failing to use your software’s auto checking functions, record-keeping failures, as well as new rules for calculating penalties for late submissions and payment. 

Here’s a closer look at what’s changed, and how to avoid a sanction… 

MTD for VAT recap 

MTD is HMRC’s new initiative to get businesses to go digital with their tax record-keeping and reporting. The MTD rules are already in place for VAT and are set to be extended to cover income tax self-assessment and corporation tax in the coming years. (Tip: if you are in receipt of rental income, take a look at our MTD guide for landlords)

As from 1 April 2022, all VAT registered businesses – including voluntarily registered businesses with a turnover under £85k – must be compliant with MTD.

Complying with MTD involves the following: 

  • You need to file your return using functional compatible software.
  • You must keep records digitally. 
  • You must use digital links to transfer or exchange data. 
  • You must use the checking functions within your software to ensure returns are accurate. 

N.B.: a breach of any or all of these requirements can result in a penalty being charged… 

Penalties for late submission and late payment 

A new penalty system comes into force, relating to VAT submissions for all accounting periods commencing on or after 1 January 2023. 

For each late VAT return submission, taxpayers accrue a penalty point, which lasts for two years before expiring. HMRC will charge a £200 penalty at each of the following thresholds:

  • Two accrued points for annual VAT return filing 
  • Four accrued points for quarterly VAT return filing 
  • Five accrued points for monthly VAT return filing

On top of the late submission penalties, HMRC will also apply the following penalties for late payment: 

  • 0-15 days: no penalty 
  • 16-29 days: 2% of the amount outstanding
  • 30 days: 2% of the tax outstanding at day 15, plus 2% of the tax outstanding at day 30

Where the VAT period starts before 1 January 2023, payments and submissions will be dealt with under the current default surcharge regime. 

Penalties for failing to use functional compatible software 

For every VAT return filed without using functional compatible software, HMRC can charge you a penalty. The penalty is £100 for businesses with turnover of £100,000 and under, £200 if turnover is between £100k and £5.6m, £300 for turnover up to £22.8m and £400 if turnover is above £22.8m. 

‘Functional compatible software’ is a program, product or application, or a set of applications that can record and store digital records, provide HMRC with returns and other information, and can receive information from HMRC. The obvious and most effective way to avoid a penalty is to use a comprehensive accounting product that meets all these criteria. You can view an updated list of HMRC-approved software here.  

Penalties for failing to keep records digitally 

For every day a business fails to keep records digitally, HMRC may charge a penalty of between £5 and £15. If there have been no previous breaches of this requirement in the last 24 months, the penalty is £5. For one previous breach, the penalty is £10; for two or more breaches, it is £15. 

This requires you to maintain an ‘electronic account’ of records within your functional compatible software. You can continue to maintain records in paper form if you prefer, but each individual transaction will ultimately need to be recorded and stored digitally. There’s a full rundown of the records you are required to maintain here. 

HMRC essentially wants businesses to keep digital records as close to ‘real time’ as possible. However, that’s not to say that you need to update your records with each and every transaction. It’s still possible to update your digital records at quarterly intervals, and one effective way of doing this is through a reliable bookkeeping service. 

This raises the question: if immediate recording isn’t obligatory, when might HMRC see fit to impose a fine for failure to maintain records? It will also be interesting to see precisely how HMRC will go about establishing how many days the breach has gone on for. In reality, we are probably only going to see penalties for failures to maintain digital records in those cases where that failure has led to significant errors. 

Penalties for failing to use digital links 

The penalty system for failing to use digital links is the same as the system for failing to keep digital records: i.e. HMRC can charge you between £5 and £15 for each day you are in breach. 

‘Functional compatible software’ doesn’t necessarily mean a single, all-in-one accounts product. For instance, you might continue to use spreadsheets for creating and maintaining your ‘digital records’, alongside a separate, dedicated program for submitting your VAT returns and receiving information from HMRC. 

However, all the links between the different elements of your functional compatible software set must be digital links. For importing data, it’s fine to use linked cells, XML/CSV import, or a dedicated program for extracting and formatting the data (an Application Programming Interface). You cannot, however, rely on manual procedures for this, such as copy & paste, or manually filling in data fields. Tip: if you are currently relying on a combination of spreadsheet-based record-keeping and supplementary software and want to check that your existing processes are MTD-compliant, speak to our North London VAT services team. 

Penalties for failing to use software checking functions 

If a return is filed with errors, as well as having to pay back any VAT owed, you can also be charged an additional penalty of up to 100% of the amount owed. Breach avoidance here is straightforward: always use the checking functions within your software to ensure returns are correct. 

What next? 

Ultimately, MTD is designed to streamline processes for recording transactions, calculating liabilities and communicating with HMRC. More broadly, the introduction of this new regime is the ideal opportunity to take a good look at existing bookkeeping processes to ensure they are as efficient as possible. For a no-obligation chat about the best ways to avoid drifting into non-compliance, speak to us today.  

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