Making Tax Digital (MTD) for VAT came into force in the UK 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 that they are HMRC compliant, and crucially, what will happen if they fail to comply with the new rules.
MTD for 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 on top of their day to day accounting. The legislation is intended to make tax administration more effective, efficient and 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 painstakingly checking through spreadsheets or files for accuracy to an end, many small businesses were quite happy with the status quo, and are reluctant to embrace this move towards digital.
We understand that change can often be difficult, so we want to make the transition as smooth as possible for those individuals who aren’t sure what the new changes to MTD for VAT will mean for them, and what the penalties will be if they get caught out. So what do business owners need to know about the new rules?
What is MTD for VAT?
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 (software that is able to meet all the demands of the new MTD rules) to submit their VAT returns.
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.
A soft landing?
For businesses and accountants who are still in the dark about how MTD will impact them, there’s no need to panic. 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. However, this doesn’t mean that HMRC won’t be issuing other VAT related penalties during the soft landing year.
In the 2019 Spring Statement, the Chancellor confirmed that HMRC would deal with late filings and record-keeping mistakes with a “light touch”, and said that “where businesses are doing their best to comply, no filing or record-keeping penalties will be issued”. 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 in 2020
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
Interest rates change over time, so you can check the level of interest rate which will apply on HMRC’s website.
How to file your VAT return under MTD
First things first. If you haven’t already done so, you’ll need to head to HMRC’s MTD for VAT sign up page.
Once this is done, you need to connect your HMRC account to your MTD compatible software
If you aren’t already using MTD compatible software, then now is the time to start. There are lots of different options available, and which one is best for you will depend on your business. When setting up your MTD compliant software, make sure that your accounting dates and VAT settings are correct. If there are errors during the implementation stage, it could cause problems down the line.
Once your accounting software is all set up, you just need to connect your HMRC account to your accounting software, authorise your software to file your VAT returns on your behalf and you’re ready to go!
Emily Coltman FCA, Chief Accountant, Free Agent
Further reading: Businesses should start engaging with HMRC digitally for VAT