The truth about VAT penalties under Making Tax Digital

The government has promised to relax its approach to penalties during the first year of Making Tax Digital for VAT but businesses must beware – it doesn’t mean they’re exempt from fines.

Making Tax Digital for VAT launched in April 2019 but many businesses and their accountants are still struggling to understand the new digital VAT reporting system and, importantly, what the penalties are for non-compliance.

The government has promised a “light touch” on compliance in the first year while businesses get used to the new system. So, what are the consequences of failing to meet your digital tax obligations?

HMRC’s “soft-landing period”

HMRC has described the first year of MTD for VAT as a “soft-landing period”. The key requirement of Making Tax Digital is for businesses to have digital links between their accounting software and HMRC. The soft-landing period means that for the first year of MTD for VAT, HMRC will not penalise businesses for not having a digital link in place. However, that doesn’t mean that businesses are completely immune from penalties.

What does “light touch” really mean?

In the 2019 Spring statement, the chancellor confirmed that HMRC would take a “light touch” approach to late filing and record-keeping mistakes and that “where businesses are doing their best to comply, no filing or record-keeping penalties will be issued”.

Reading between the lines, there are two things that might still constitute a penalty offence:

  1. If your business is not doing its best to comply with MTD VAT filing and record-keeping;
  2. If your business pays its VAT bill late.

In these two scenarios, it’s best to assume that HMRC maintains the right to apply the current VAT penalties.

Current VAT penalties for late payments

Businesses will certainly be given some leeway in the first year of MTD for VAT; however, if you miss a payment deadline you will enter a 12-month period during which you may well have to pay a surcharge on top of your existing VAT bill if you continue to miss deadlines.

The surcharge amount changes depending on how many times you miss a VAT payment and it also depends on your turnover.

Defaults within 12 months

Surcharge if annual turnover is less than £150,000

Surcharge if annual turnover is £150,000 or more

1st

No surcharge

No surcharge

2nd

No surcharge

2% (no surcharge if this is less than £400)

3rd

2% (no surcharge if this is less than £400)

5% (no surcharge if this is less than £400)

4th

5% (no surcharge if this is less than £400)

10% or £30 (whichever is more)

5th

10% or £30 (whichever is more)

15% or £30 (whichever is more)

6 or more

15% or £30 (whichever is more)

15% or £30 (whichever is more)

HMRC is also entitled to charge penalties up to:

  • 100% of any tax under-stated or over-claimed if your VAT return contains a careless or deliberate inaccuracy;
  • 30% of a VAT assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days;
  • £400 if you submit a paper VAT return, unless HMRC has told you that you’re exempt from MTD.

The main message for small businesses is that, even in the first year of Making Tax Digital, you could be penalised for failing to pay your VAT bill or if HMRC considers that you have not made enough effort to comply with Making Tax Digital for VAT.

New penalty points system for VAT from 2020

Following the soft-landing period, HMRC will update the VAT penalty system to bring it in line with penalties for late submission and payment of income tax and corporation tax. This will be based on a penalty points system and 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;
  • Penalty points will last for two years before they expire.

As well as a change to VAT submission penalties, late payment of VAT returns is also changing:

VAT payment delay

Penalty

Late by 15 days

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

The interest rate charge changes with time; you can check how much interest applies on the HMRC website.

So, while the government has promised leniency on filing and record-keeping for businesses doing their best to comply with MTD for VAT, it has not promised any breaks for businesses that do not pay their VAT bill on time or who do not make any effort to comply.

Now’s the time to work on your MTD compliance if you haven’t started already.

This guide is based on an article supplied by FreeAgent.