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Avoiding VAT penalties with Making Tax Digital

Though VAT-registered businesses should be submitting tax returns through Making Tax Digital already, some businesses have been able to continue using their VAT online account as well.

However, from Tuesday 1st November, this option will not be available for businesses filing monthly or quarterly VAT returns. The only option is to file through Making Tax Digital using compatible software – otherwise, your business could face a penalty from HMRC from 1st January 2023.

As difficult as adjusting to the new system might be, Making Tax Digital isn’t here to catch you out. It’s here to help reduce errors and make filing and paying VAT easier so businesses can get it right the first time. According to gov.uk, over 1.8 million businesses are benefitting from MTD, with more than 19 million tax returns filed through the service already.

If you’re concerned about Making Tax Digital penalties, here’s a quick guide to what could happen if you don’t file your VAT returns correctly, and what you can do to make sure your business complies with the new rules and doesn’t receive a financial penalty.

What are the penalties for late VAT returns?

While HMRC is allowing businesses that file annual VAT returns to continue using their VAT online accounts until 15th May 2023, any business that files monthly or quarterly must use MTD only.

If your business fails to submit a VAT return through MTD-compatible software, you could receive a fine of up to £400 per non-compliant return. However, if your annual turnover is less than £100,000, then the maximum penalty you could receive for not submitting returns through MTD is £100.

If you fail to keep records digitally in the MTD-compliant software, you could be charged from £5 to £15 per day until you have updated the records correctly and used digital links to transfer your data.

Additionally, if you don’t use the software properly – such as failing to use the checking tool either deliberately or carelessly – and submit an incorrect VAT return with mistakes, then HMRC can charge you a penalty of up to 100% of the VAT you owe (in addition to having to pay that VAT).

VAT late submission penalties

The new penalty system for late submission of VAT returns will be a points-based system. From January 2023, businesses will start to accrue penalty points for every late submission.

You will receive 1 point every time you miss a deadline for filing a VAT return. These points will stay on your account for 2 years until they expire, and HMRC will charge you £200 if you receive a certain number of points for late submission:

  • Annual filing = 2 points
  • Quarterly filing = 4 points
  • Monthly filing = 5 points

This means that you’ll have to pay £200 if you miss the filing deadline for two annual submissions, four quarterly submissions, or five monthly submissions within a 2-year period.

VAT late payment penalties

In addition to the late submission penalties changing from January 2023, so are the penalties for late payment of VAT. It’s similar to the old system, but with different thresholds, with penalties being proportionate to how late the submission is:

  • 0–15 days late = 0% (no penalty)
  • 16–29 days late = 2% of the outstanding balance
  • 30 days late = 2% of the outstanding balance at day 15 + 2% of the balance at day 30
  • 31+ days late = 4% of the outstanding balance calculated daily

Late payment penalties will only be applied after 15 days, but remember that interest will be charged daily from the original due date (currently at a rate of 4.75%).

HMRC is willing to be lenient for the first year of implementing this new system, so you may be able to avoid a penalty for up to 30 days if you can prove that your business is doing everything possible to comply with the new rules so you can reach an agreement with HMRC.

How can you avoid VAT penalties?

If you have a VAT-registered business, the most straightforward way to avoid penalties on VAT returns is to follow the rules for the Making Tax Digital system, meet your deadlines for filing, and make your VAT payments on time.

To do this, you must be signed up to Making Tax Digital for VAT, and have compatible accounting software set up to share your digital records securely. You must use this to store your records digitally and file online through MTD from now on.

Keeping digital records means storing the following information in your electronic account:

  • Business name, address, and VAT registration number
  • VAT on goods and services supplied (sold, leased, rented, or hired)
  • VAT on goods and services received (bought, leased, rented, or hired)
  • ‘Time of supply’ and ‘value of supply’ (excluding VAT) for everything bought and sold
  • VAT rate you charged on goods and services
  • Any adjustments made to a return (including from calculations made outside the compatible software for any VAT accounting schemes used)
  • Reverse charge transactions (when VAT is recorded on the sale price and purchase price of the goods/services you buy)
  • Documentation covering multiple transactions made on your behalf (e.g. by volunteers fundraising for charity, or a third party or employees for petty cash expenses)

You don’t need to scan all your paper records, such as invoices and receipts, but you should enter or transfer all information digitally. Data must not be transferred or exchanged between software programmes manually.

Before you file a VAT return, make sure you use the checking function in your MTD-compatible software to catch potential errors before you submit it. Otherwise, you could be penalised for making mistakes, even if it was a genuine accident.

What support is available for VAT-registered businesses?

Digital tax returns are now compulsory for VAT-registered businesses, unless subject to insolvency procedures or given an official Making Tax Digital exemption by HMRC. There are limited excuses for failing to use MTD correctly or on time that HMRC might consider reasonable.

If you’re finding it difficult to switch to Making Tax Digital, there is plenty of support on the government website to help you transition to digital VAT returns. This includes webinars, videos, and extra support for those with accessibility issues.

If you’re having financial difficulties, your business may be able to get up to 50% off the price of compatible digital accounting software through the Help to Grow: Digital scheme.

Or, if your difficulties lead to you accruing penalties that you’ll struggle to pay, HMRC offers a Time to Pay service, which allows you to set up a payment schedule. You can pay your debt off in instalments over 12 months without receiving further penalties.

Are you one of the business owners who still needs to overhaul their accounting system and get set up with Making Tax Digital? It may seem like an inconvenience now, but the new processes will help you to manage your finances and keep up with taxes much more easily in the long-term.

If you’re looking for a tax agent to help you register with MTD and get started with new digital accounting software, the team at GBAC, accountants in Leeds, not only Barnsley, can help. Get in touch with us by calling 01226 298 298 or emailing info@gbac.co.uk to find out how we can assist you and your business.