Making Tax Digital for VAT (MTD) is now live, and some businesses may find that they struggle to get to grips with the new requirements it brings. It is therefore essential to have a clear understanding of how HMRC might apply penalties under MTD and what businesses should do if they encounter problems or things go wrong.
It is important to note that there is no blanket soft landing with regards to MTD penalties. HMRC are expecting businesses to make a genuine effort to comply. The only real soft landing in MTD is a limited relaxation on the requirement for digital links between software in the first year (see section 184.108.40.206 of VAT Notice 700/22). HMRC have however said they will apply a light touch approach to certain penalties in the first year of MTD, as set out below.
What penalties might apply under MTD?
There are broadly three failures under MTD which could expose businesses to penalties:
- Failure to keep the required digital records
- Late filing of VAT returns
- Late payment of VAT.
The existing penalties under the current VAT regime will carry over to MTD for all of these.
This does unfortunately mean that default surcharge remains with us. A new, points-based approach to late filing penalties and a new late payment regime were expected to be in place in time for the introduction of MTD. However, it was announced at last year’s Autumn Budget that these will be deferred to a future Finance Bill. They are therefore now unlikely to be introduced before April 2021.
What approach will HMRC take?
HMRC acknowledge that businesses may encounter problems complying with their new obligations. They have stated that they will take a proportionate light touch approach to record-keeping penalties. This means that, where businesses are doing their best to comply, HMRC will not pursue record-keeping penalties in the first year of mandation.
It should be stressed that this light touch only applies to record-keeping penalties and only where businesses have made a genuine effort to comply with the MTD requirements. Those who stick their head in the sand, or make limited efforts, remain on the hook for record-keeping penalties.
There is no equivalent light touch for late payment or filing penalties.
HMRC’s view is that there is no need to relax the default surcharge regime as MTD should not increase the risk of a penalty. This is on the grounds that a default surcharge penalty is only levied if a business pays their VAT late – late submission of a return alone does not result in a penalty (though it will extend the surcharge period and could therefore increase the risk of a future late payment penalty).
HMRC have been very clear that they want VAT to continue to be paid on time under MTD and that the businesses which do not pay their VAT, or pay late, remain exposed to penalties in the normal way.
What should businesses do?
A key piece of advice is that businesses should only sign up for MTD when they are ready and have their software in place and working. Once signed up, HMRC will expect all future VAT returns to be filed through MTD software – including those for current / previous periods which have not yet been submitted – and businesses will no longer be able to file returns using the VAT portal. It may therefore be a good idea to wait until you have filed your last ‘pre-MTD’ return before signing up. Although MTD went live on 1 April, there is no requirement to sign up for MTD by this date. A detailed illustration of when businesses should sign up for MTD can be found here on the ATT website.
To protect against a default surcharge penalty, businesses should ensure they pay the right amount of VAT at the right time – even if they struggle or fail to keep records digitally or to file their VAT returns using MTD-compliant software. This may be more difficult for those who pay by direct debit, as their payment will only be triggered when the return is filed. As a result, a late filing may well result in a late payment, bringing the risk of a penalty.
HMRC’s advice is that, where businesses are struggling to comply with the MTD requirements, then the best thing to do is to contact your software provider and/or HMRC as soon as possible to try and resolve their problems. Contacting HMRC has the advantage of making HMRC aware of any problem at the time.
If businesses do face issues outside their control (such as a software meltdown) and end up receiving a penalty, they should contact HMRC as soon as possible to explain the situation. It may be necessary to appeal the penalty on the grounds that there was a reasonable excuse – it is vital to document any problems encountered and collect evidence to support this (for example screen shots of error messages, contemporaneous file notes etc.).
Finally, if businesses are concerned about penalties for failing to keep the required digital records it might be a good idea to briefly document what they have done and why. This may help in demonstrating to HMRC that they have made their best effort to comply and therefore improve their chances of benefiting from the promised light touch.
Got an opinion on HMRC’s approach to MTD compliance? Please leave it in the comments below.
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MTD penalties – soft landings, light touches and hard lines