Making Tax Digital

Making Tax Digital (MTD) is still confusing many small and growing businesses.

MTD for VAT came into force on 1st April 2019, but while the deadline may have come and gone many businesses and accountants affected by the new rules are still trying to sort the fact from the fiction.

Many are still unsure as to what they need to do to ensure they are HMRC compliant. VAT is the first major phase in the government’s overall initiative to make tax digital, which is designed to make it easier for businesses to keep day to day accounting.

The legislation is intended to make tax administration more:

  • effective
  • efficient
  • easier for taxpayers

By integrating digital record keeping and enabling businesses to generate and send updates directly from their chosen accounting software to HMRC.

While the government’s intention is to bring the days of foraging for receipts and checking through spreadsheets or files to an end.

Many small businesses were quite happy with the how things were and are reluctant to embrace this move towards digital.

So what do business owners need to know about the new rules?

Over £85K In Sales?

In very simple terms, MTD for VAT requires VAT registered businesses with annual VATable sales of over £85,000 to keep their VAT records digitally and use MTD compatible software to submit their VAT returns.

Payment Deadlines

The payment deadlines and the frequency with which individuals have to file VAT returns will remain the same as they were prior to MTD. So if you pay your VAT monthly or quarterly the deadline for submitting your return and paying any VAT you owe is still one calendar month and seven days after the end of the VAT period.

HMRC has said that the first year of MTD for VAT (beginning 1st April 2019) will be a “soft landing period”. This means that if your business is affected by MTD, you will have a year to create a “digital link” or connection between the software where you keep your accounts and HMRC. During this period, HMRC will not penalise businesses that don’t have a digital link in place.

Despite these stated leniencies, if we read between the lines, there are still a couple of things that we can assume will still constitute a penalty offence within the soft landing period:

  • If a business is not doing its best to comply with MTD VAT filing and record-keeping requirement
  • Late payments of VAT bills

In these two cases, HMRC is highly likely to maintain its right to apply the current VAT penalties.

Current VAT Penalties

Missing a VAT deadline triggers a 12 month period during which you may be required to pay a surcharge on top of your existing VAT bill if you continue to miss deadlines. The value of this surcharge will depend on how many times a VAT payment is missed.

Other VAT penalties that are likely to apply during the first year of MTD are:

  • Sending a VAT return that contains a careless or deliberate inaccuracy can result in a penalty of​ up to 100% ​of any tax under-stated or over-claimed;
  • Failing to alert HMRC within 30 days if you send a VAT assessment which is too low can result in a penalty of ​up to 30% of the assessment;
  • Submitting a paper VAT return can result in a penalty of ​up to £400 unless HMRC has granted you an exemption from submitting an online return.

New VAT Penalties

Once the soft landing period has finished, the VAT penalty system for late submission will be updated to bring it more into line with the penalty points systems for late submission and payment of Income Tax and Corporation Tax.

The current plan is that late VAT submissions will accrue penalty points as follows:

  • One penalty point for a missed VAT return
  • A fine after four accumulated points for a missed quarterly VAT return
  • A fine after four accumulated points for a missed monthly VAT return

Penalties for late payment of VAT are also changing in 2020, and will be as follows:

  • Up to 15 days late: no penalty
  • Late payment between 15 and 30 days: 50% of HMRC interest rate charge
  • Late payment after 30 days: 100% of HMRC interest rate charge, plus daily interest charge

MTD can be a challenge and we recommend you seek help and guidance from locally based accountancy firms for the best results.


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